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BBM 475 NOTES

INTRODUCTION TO INTERNATIONAL BUSINESS

1. Definition of international buine

International business involves commercial activities that cross national frontiers. It

concerns the international movement of goods, capital, services, employees andtechnology; importing and exporting; cross-border transactions in intellectual

property (patents, trademarks, know-how, copyright materials, etc.) via licensing

and franchising; investments in physical ; nancial assets in foreign countries;

contract manufacture or assembly of goods abroad for local sale or for export to

other nations; buying and selling in foreign countries; the establishment of foreign

warehousing and distribution systems; and the import to one foreign country of

goods from a second foreign country for subse!uent local sale.!"# fir$ en%a%e in international buine

"usinesses undertake international operations in order to expand sales, ac!uire

resources from foreign countries, or diversify their activities (#nderson $%%&).'pecic reasons for doing business abroad include the saturation of domestic

markets discovery of lucrative opportunities in other countries the need to obtain

materials, products or technologies not available in the home nation; increases in

the ow of information about conditions in foreign states; desires to expand the

volume of a rm*s operations in order to obtain economies of scale or the need to

nd an outlet for surplus stocks of output. +urther motives for operating

internationally are as follows

a) ommercial risk can be spread across several countries.

b)Involvement in international business can facilitate the *experience curve* eect,i.e. cost reductions and eciency increases attained in conse!uence of a business

ac!uiring experience of certain types of activity, function or pro/ect. 0hese eects

dier from economies of scale in that they result from longer experience of doing

something rather than producing a greater volume of output. 1oreover, the rm*s

management is exposed to fresh ideas and dierent approaches to solving problems.

Individual executives develop their general management skills and personal

eectiveness; become innovative and adopt broader hori2ons. #ll these factors can

give a rm a competitive edge in its home country.

c) 3conomies of scope (as opposed to economies of scale) might become available.

3conomies of scale are reductions in unit production costs resulting from large-scaleoperations. ommon examples are discounts obtained on bulk purchases, benets

from the application of the division of labour, integration of processes, the ability to

attract high calibre labour and the capacity to establish research and development

facilities. 'imilar benets might occur from *economies of scope*, i.e. unit cost

reductions resulting , from a rm undertaking a wide range of activities, and hence

being able to provide common services and inputs useful for each activity. 4ote how

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economies of scale might not be available if the rm has to modify its products,

promotional strategies and business methods substantially for each country in

which it operates, and that the extra costs of foreign marketing, establishment of

subsidiaries in other countries, market research, etc., could erode the benets

obtained from a higher volume of output.

d) 0he costs of new product development could re!uire so much expenditure that

the rm is compelled to adopt an international perspective.

e) 0here might be intense competition in the home market but little in certain

foreign countries.

f) # company*s overall strategies and plans can be anchored against a wider range

of (international) opportunities. 'udden collapses in market demand in some

countries may be oset by expansions elsewhere.

g)ross-border trade is today much easier to organi2e than in the past. International

telephone and fax facilities are much better than previously and facilities for

international business travel are more extensive. 5ence it is simpler to visit

potential foreign customers, partners and6or suppliers, to select the best locationsfor operations, and thereafter to control international activities.

Why enter overseas markets? 0he reasons for entering overseas markets can be categori2ed into 7push8 and

7pull8 factors Push factors

'aturation in domestic markets

3conomic diculty in domestic markets

4ear the end of the product life cycle at home

9isk diversication

3xcess capacity

Pull factors

0he attraction of overseas markets

Increase sales

3n/oy greater economies of scale

3xtend the product life cycle

3xploit a competitive advantage

:ersonal ambition

+actors in the choice of which overseas market(s) to enter

'i2e of the market (population, income) 3conomic factors (state of the economy)

ultural linguistic factors (e.g. preference for countries with similar cultural

background)

:olitical stability (there is usually a preference for stable areas)

0echnological factors (these aect demand and the ease of trading)

Constraints and diculties in entering overseas markets;


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9esources 0ime

< 1arket uncertainty< 1arketing costs

< ultural dierences

< =inguistic dierences< 0rade barriers

9egulations and administrative procedures

:olitical uncertainties

3xchange rates (transactions costs > risks)

:roblems of nancing

?orking capital problems

ost of insurance

@istribution networks

#ll the basic tools and concepts of domestic business management are relevant tointernational business.5owever, special problems arise in international business not

normally experienced when trading or manufacturing at home. In particular

@eals might have to be transacted in foreign languages and under foreign

laws, customs and regulations.

Information on foreign countries needed by a particular rm may be dicult

(perhaps impossible) to obtain.

+oreign currency transactions will be necessary. 3xchange rate variations can

be very wide and create many problems for international business.

4umerous cultural dierences may have to be taken into account when

trading in other nations. ontrol and communication systems are normally more complex in foreign

than for domestic operations.

9isk levels might be higher in foreign markets. 0he risks of international

business include political risks (of foreign governments expropriating the

rm*s local assets, of war or revolution interfering with trade, or of the

imposition of restrictions on importers* abilities to pay for imports);

commercial risks (market failure, products or advertisements not appealing to

foreign customers, etc.); and nancial risks - of adverse movements in

exchange rates, tax changes, high rates of ination reducing the real value of

a company*s foreign working capital, and so on. International managers re!uire a broader range of management skills than do

managers who are concerned only with domestic problems.

=arge amounts of important work might have to be left to intermediaries,

consultants and advisers.

It is more dicult to observe and monitor trends and activities (including

competitors* activities) in foreign countries.

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Why study international business?

4owadays the great ma/ority of large enterprises operate internationally (as do an

increasing number of small to medium si2ed rms), so that an awareness of the

ma/or issues in international business is a valuable asset for any manager in a

company that deals with suppliers, customers, contractors, licensees, etc., in othercountries. 0he study of international business helps the individual supplement his or

her knowledge of general business functions (accounting and nance, personnel,

marketing, etc.) through examining issues, practices, problems and solutions

relating to these functions in foreign states. #lso, it develops a person*s sensitivity

to foreign cultures, values and social norms, thus enabling the individual to adopt

broader perspectives and hence improve his or her overall managerial eciency.

4ote how rms involved in international business necessarily operate in

multifaceted, multicultural environments.

Entry strategies to foreign market:

3xporting, =icensing, Aoint Benture, @irect Investment and 3xporting3xporting is the marketing and direct sale of domestically-produced goods in

another country. 3xporting is a traditional and well-established method of reaching

foreign markets. 'ince exporting does not re!uire that the goods be produced in the

target country, no investment in foreign production facilities is re!uired. 1ost of the

costs associated with exporting take the form of marketing expenses.

3xporting commonly re!uires coordination among four players

3xporter, Importer, 0ransport provider and Covernment

Licensing

=icensing essentially permits a company in the target country to use the property of

the licensor. 'uch property usually is intangible, such as trademarks, patents, andproduction techni!ues. 0he licensee pays a fee in exchange for the rights to use the

intangible property and possibly for technical assistance.

"ecause little investment on the part of the licensor is re!uired, licensing has the

potential to provide a very large 9DI. 5owever, because the licensee produces and

markets the product, potential returns from manufacturing and marketing activities

may be lost.

Franchising

0his is a special form of licensing which allows the franchisee to sell a highlypublici2ed product or service using the parentEs brand name or trademark, carefully

developed procedures and marketing strategies. In exchange the franchisee pays a

fee to the parent company typically based on the volume of sales of franchisor in its

dened market area e.g. oca ola

Foreign ranching

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0his is an extension of the company in its foreign market- a separately located

strategic business unit directly responsible for fullling the operational duties

assigned to it by corporate management including sales, customersE service and

physical distribution. 5ost countries may re!uire that branch companies to be

domesticated i.e. have managers in middle and higher level positions to come from

the host country.

!oint "enture

0here are ve common ob/ectives in a /oint venture market entry, risk6reward

sharing, technology sharing and /oint product development, and conforming to

government regulations. Dther benets include political connections and

distribution channel access that may depend on relationships.

#uch alliances often are favorable $hen

0he partners* strategic goals converge while their competitive goals diverge;

the partners* si2e, market power, and resources are small compared to theindustry leaders; and

:artners* are able to learn from one another while limiting access to their own

proprietary skills.

0he key issues to consider in a /oint venture are ownership, control, length of

agreement, pricing, technology transfer, local rm capabilities and resources, and

government intentions.

%nternational usiness &erms

Drgani2ation structures have given rise to the following companies

%nternational com'aniesare importers and exporters and have no investmentoutside their country.

(ultinational com'anieshave investment in other countries, but do not have

coordinated product oerings in each country. 0hey more focused on adapting their

products and services to each individual local market.

)lobal com'anieshave invested and are present in many countries. 0hey market

their products through the use of the same coordinated image6 brand in all markets.

Cenerally one corporate oce that is responsible for global strategy. 3mphasis is on

volume, cost management and eciency.

&ransnational com'anies are much more complex organi2ations they have

invested in foreign operations have a central corporate facility but give decisionmaking, 9>@ and marketing powers to each individual foreign market.

(ultidomestic industries:rms compete in each national market independently

of other national markets. Involves products tailored to individual countries

innovation comes from local 9>@. 0here is decentrali2ation of decision making

within the organi2ation

0hese corporations have been oriented into four types

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Ethnocentric: governance is top down, strategy is global integration, products

development is determined primarily by the needs of home country customers and

people of home country are developed for key positions everywhere in the world.

Polycentric: governance is bottom up where each subsidiary decides on local

ob/ectives, strategy is national responsiveness, local products are developed based

on local needs and people of local nationality are developed for key positions intheir own country.

*egiocentric: governance is mutually negotiated between regions and its

subsidiaries, strategy is regional integration and national responsiveness, products

are standardi2ed within region but not across regions, regional people are

developed for key positions anywhere in the region,

)eocentric: governance is mutually negotiated at all levels of the corporation,

strategy is global integration and national responsiveness, global products with local

variation, best people everywhere in the world are developed for key positions

everywhere in the world.

E&OLUTION O' INTERNATIONAL BUSINESS

T"e E()loration Era to 15**

0he history of business dates back to prehistoric times. Billages formed to allow

early divisions of labor to provide goods and services for communities. #s expertise

accumulated in the production of goods, infrastructures (mainly roads) were built to

link communities, and local markets evolved into regional markets, attracting

increased varieties of merchants and manufacturers. #s regional markets took

shape, road and transportation systems developed to link ma/or commercial

centers, and national markets for products emerged. 0he ancient civili2ations of

=atin #merica (the Incas, 1ayas, and #2tecs), 3gypt (the :haraohs, pyramids),

?estern 3urope (the Creeks and the 9omans), and #sia (India and hina) illustratehumankindEs early eorts to innovate and use technology to upgrade standards of

living. "ut in those days, advances in technologies and living standards were slow to

move beyond national frontiers. #s commerce extended throughout countries,

merchants began to look to foreign markets for trading opportunities, and so the

seeds of international business were sewn. In its early years, international

commerce was limited to the reliability of seafaring ships, and land routes were

popular. +rom the Hth century ", the 'ilk 9oad, running from the 1iddle 3ast to

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hina, was a ma/or commercial conduit carrying artifacts, metals, and semiprecious

stones across #sia, as well as new ideas such as "uddhism and Islam. =ater, the

9omans demonstrated the importance of supply routes as they managed an empire

stretching from "ritain across 3urope to reach the 1iddle 3ast and 4orth #frica.

0rade routes were established and roads built to e!uip its armies; a common

currency (the @inarius) was used to lubricate commercial dealings.1a/or steps forward occurred in the $th and $&th centuries as compasses for

navigational use, advances in sails and rigging, and hinged rudders revolutioni2ed

ocean travel. Italian explorer 1arco :olo reached hina by the late $&th century.

Basco de Cama, a :ortuguese navigator, circumnavigated the 'outh #frican ape of

Cood 5ope to reach India in $F%, and olumbus ocially was the rst 3uropean to

discover the #mericas in $F%. 0o replenish ships and to provide bases for further

exploration, trading outposts were built. #s the commercial potential of the

#mericas and #sia unfolded, regular trading routes were established. 0o nance

transcontinental trade, new corporate forms emerged in Italy and later in 3urope

such as /oint stock companies. Intercontinental trade prospered until nationalistic

concerns took over, and 3uropean countries saw merit in taking political control of

the new foreign markets.

Modern-day efects. ?hile the rudiments of an international trading system were

taking shape, other, long-lasting cultural transplants were occurring as religious

spheres of inuence were established. 0he 9omans adopted hristianity in the Fth

century and spread it throughout their 3uropean empire. Islam diused throughout

the 1iddle 3ast and 4orth #frica and along the 'ilk 9oad to #sia. "uddhism moved

eastward from India to 3ast #sia, and onfucianism and 0aoism moved westward

from hina to 3ast #sia, also through trade and via the 'ilk 9oad. 0hese early

movements established the ma/or spheres of religious inuence that we have today.

15**+1,**- T"e Colonial Era0he olonial 3ra saw military con!uests, coloni2ation, and the advent of regularinternational trade taking technologies to other nations, as the ma/or 3uropeanpowers competed to establish empires in the #mericas, #frica, and #sia. +oreigninuences were magnied through difusion catalysts ideas, philosophies, andtechnical innovations that increased the speed, eciency, and eectiveness of themovements of ideas and goods between and within nations. 0hese diusioncatalysts included the followingThe development o mega languages. +or ideas and technologies to travel,there had to be common means of communication between markets. In early times,these were Creek, =atin, and 1andarin hinese. In later years, use of 3nglish and3uropean languages facilitated the transfer of ideas and technologies amongcountries.

Advances in arms and military capabilities. 0he advent of cannons andrearms gave coloni2ing powers signicant advantages over local populations,enabling them to subdue and maintain control of colonies with limited manpowerand resources.Writing and printing technologies extended the spread of knowledge beyondpersonal experiences and oral transmissions. 7:otted8 knowledge, in the form ofbooks, brought about a broadening of individual knowledge bases. +ormal education

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systems, emphasi2ing literacy and technical skills, led to a wider dissemination ofskills via schools, guilds, and universities. Knowledge became increasingly mobileand transferable.Transportation innovations.0he steam engine revolutioni2ed industry and travelwith its applications to factories ($J$), ships ($J&), rail ($L&M$%), and buses($F). 0he steam engine brought international markets closer together and

provided access to remote corners of large national markets. #s the coloni2ingpowers took these innovations to foreign markets, the transportation of goods overwider areas created regional and national markets for merchandise.

Advances in communications complemented transportation innovations.0he $%th century saw the advent of the electronic telegraph and the telephone."oth facilitated information ows between and within national markets, and aidedmarket supply and demand mechanisms. 0hese factors, along with national printmedia, gave the world a connectivity it had never before experienced.

+,--.&oday: &he Era of the %nternational Cor'oration"y the end of the $%th century, much of the world had been explored and coloni2ed.?hile foreign inuences had introduced new technologies and lifestyles into thedeveloping world, there had been some notable early backlashes, especially in the#mericas with N.'. independence in $JJH and =atin #mericaEs between $$L and$F. #s the Lth century unfolded, independence movements gained momentumin #frica, the 1iddle 3ast, and #sia190019!"# $ompany internationali%ation. "ut the next globali2ation wave waswaiting in the wings, and companies began to replace countries as the ma/orcatalysts of economic and cultural change. # "elgian company established the rstforeign subsidiary in :russia (todayEs Cermany) in $&J, and commensurate withtheir overseas interests, most 3uropean investments up to $%FG were colonies-based. #s a result of their industriali2ation and coloni2ation eorts then, ?estern3urope was the center of international business at the turn of the last century. Inrecognition of this trend, Aapanese trading companies such as 1itsui and the

Ookohama 'pecie "ank had set up oces in ?estern 3urope in the $Ls, alongwith numerous Aapanese shipping and insurance companies.19!"19&0# 'ra o increasing international competition. It was not until the

$%GLs that corporations began to reassert themselves in international markets. 0he

Nnited 'tates, whose economy had suered least in ?orld ?ar II, was the rst to

reinitiate foreign investments, and during the $%GLs and $%HLs N.'. rms

established secure footholds in anada and in the re-emerging ?estern 3uropean

economy. 0he $%HLs and $%JLs saw the revitali2ation and expansion of Aapanese

and 3uropean rms in the international marketplace as market blocs such as the

3uropean 3conomic ommunity (todayEs 3uropean Nnion) and free trade

movements increased the number of opportunities in the worldwide marketplace.@uring this period, the old ?ar political rivalry between the Nnited 'tates and the

N''9 dampened commercial prospects.

TE /LOBALI0ATION ERA SINCE 1,*

@uring the $%Ls, the world marketplace changed yet again. 0he collapse ofcommunism and the industriali2ation of developing markets led to signicantincreases in global commerce. 0he internationali2ation of 4orth #merican, ?estern


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3uropean, and Aapanese rms had contributed to an upsurge of commercialactivities in the developing world, and by the $%%Ls, developing market competitorswere entering world markets, including :etrPleos de Bene2uela; @aewoo, 'amsung,5yundai, and =C Croup (Korea); emex and Cruma (1exico); and :etroleo "rasileiro,Bale do 9io @oce, and erve/aria "rahma ("ra2il). #s the new millennium gotunderway, companies from the developing

and transition economies (hina, #rgentina, :hilippines, 'outh #frica, 1alaysia,'ingapore, and India, among others) were internationali2ing and heighteningcompetition in the world marketplace. umulatively, they invested Q$%& billionabroad in LLHR$H percent of world investment ows.

&he (a/or Catalysts of Post0+,1- )lobali2ation(nternational trade. 0he world hasmoved irrevocably toward free trade since$%FG through the eorts of the Ceneral #greement on 0aris and 0rade (C#00, aNnited 4ations agency) until $%%G, and since that time, through C#00Esreplacement, the ?orld 0rade Drgani2ation (?0D). 0he results have been dramatic.'ince $%FG, taris have fallen from an average of over FL percent for industrialgoods to less than F percent. ?orld trade expanded from Q trillion in $%L to aboutQ$L trillion in LLG. 0he expansion of world trade has been aided by the N4EsInternational 1onetary +und (I1+), which monitors foreign exchange rate valuesamong nations and provides aid to countries with international debt problems.Increasingly ecient air and ocean transportation systems have also aidedinternational trade expansion.Trade blocs. +or some countries, the worldwide liberali2ation of trade andcommerce did not occur fast enough, and countries got together to form trade blocsto facilitate commercial interactions among members. 0he 3uropean 3conomicommunity (now the 3uropean Nnion) was formed in $%GJ. 'ince then, trade blocshave been formed in 4orth #merica (4orth #merican +ree 0rade #rea), 'outh#merica (the 1ercosur and #ndean :act groups), and also in #sia and #frica.)oreign direct investments *)+(, occur when international companies make

investments in factories, plants, and machinery in nondomestic markets. #s rms

have increased their international commitments, +@I has grown from QH$G billion in

$%L to over Q$ trillion in LLH. 4ation-states, recogni2ing the economic stimulus

+@I provides, have increasingly worked to make their economies more attractive to

international corporate investors.

0hroughout history, there have been three ma/or reasons for international business

expansion. In early times ($Hth through Lth centuries), explorers looked for new

resources (often gold, silver, or mineral deposits). 0hen, as countries began to

develop, businesspeople began to regard distant nations as markets (the olonial

3ra). +inally, as free trade movements took hold after $%FG, eciency-seekingcompanies looked to overseas markets as manufacturing sites to lower global costs

of doing business. 0oday, all three ma/or motives (resource seekers, market-seekers,

eciency-seekers) are reasons why rms invest abroad.

lobal movements toard capitalism. 0he demise of communism in the $%Lsand $%%Ls left little competition for capitalism to be the worldEs dominant economicand political philosophy. 'ince that time, =atin #merica, 3astern 3urope, and #sia

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have slowly opened up their markets and become active participants in the globalmarketplace. ?ithin national markets, former government-owned industrialmonopolies such as airlines, telecommunications, energy, and utilities have beensold back into the private sector (privati2ation), and their markets deregulated toallow companies to compete for market share and prots.Technology and global media. 0he advent of satellite, computer, and Internet

technologies has transformed worldwide communications and facilitated informationows among nations, companies, and individuals. #t the nation-state level, it hasbecome increasingly dicult for countries to isolate their citi2ens from outsideinuences, and consumers worldwide have begun to en/oy the benets of theinternational marketplace. ompanies now have superior abilities to coordinateactivities, products, and strategies across markets, and individuals have increasedaccess to new ideas, philosophies, products, and lifestyles.)lobali2ation and the 3evelo'ing WorldNp to $%G, the 0riad nations of 4orth #merica, ?estern 3urope, and Aapan were

dominant in world commerce, and are still today the ma/or providers of global

capital. "ut as developing markets opened up to trade and investments, new ideas

and technologies began to contribute to economic and cultural change. 0rade andinvestments brought many new (and aordable) products to developing nations.

0he advent of global media made information more readily available to developing

nation publics that, coupled with moves toward democrati2ation, have made

politicians more accountable to their electors.

"ut the diusion of technologies and conse!uent moderni2ation processes have

barely aected many emerging markets, where large percentages of national

populations still reside in agriculturally based rural areas, largely untouched by

moderni2ation trends. #s the Nnited 4ations noted,

(oderni2ation4 Westerni2ation4 and 5mericani2ation0ransfers of technology and foreign intrusions into national cultures have been

occurring for hundreds of years. 'tarting with the 3uropean coloni2ation movement

of the $Hth century, and proceeding through the industrial revolutions of the $th

and $%th centuries, the spread of technology has /umpstarted moderni2ation

movements in many countries as scientic and technological advances have

upgraded national lifestyles and aided ecient resource use. In contrast,

?esterni2ation can be dened as the inculcation of (mainly) N.'. and 3uropean

values on national cultures. #s ma/or international traders throughout the Lth

century, N.'. and 3uropean inuences on other nationsE lifestyles has been

extensive, and as N.'. power has increased, so 7#mericani2ation8 has become

synonymous with ?esterni2ation. 5ollywood movies dominate the world marketwith JL percent market share in the 3uropean Nnion and over GL percent of the

Aapanese market.

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INTERNATIONAL BUSINESS TEORIES

&6E7*%E# 7F %8&E*85&%785L &*53E

0heoreticians seek general explanations of phenomena in order to *see the wood

from the trees* and to make sense of what otherwise would be a bewildering array

of seemingly random items of information. 0heories of international business

attempt to answer two !uestions why nations trade, and what determines the

pattern of international investment.

+9 Com'arative cost theory

In his famous book The Wealth o Nations (published in $JJH) #dam 'mith put

forward the theory that international trade would occur in situations where nationshad *absolute advantages* over rival states, i.e. they ould produce with a given

amount of labour and capital larger outputs of certain items than any other country.

0he aw in this argument is that it fails to explain why countries with an absolute

disadvantage in all their products (i.e. countries which produce lessof everything

made within the country, using a given amount of labour and capital, than other

nations) still engage in international trade. # possible resolution of this !uestion was

suggested by the eminent economist @avid 9icardo, who in $$J alleged that trade

among nations resulted from dierences in the *comparative* advantages of

countries in the production of various items, not dierences in absolute

0able $.$ Item # Item "

ountry $

ountry

advantage. 9icardo assumed that the cost of producing any good depended onlyon

the amount of labour used in its production, and that rms and workers could not

move freely between nations (a reasonable assumption for the early $LLs).

0he theory is illustrated by 0able $.$, which shows the time needed to produce two

hypothetical items in two dierent countries. It takes more days of labour to

produce both items in country than in country $, so that country has an absolute

disadvantage in the production of each item. 9icardo assumed (importantly) that

one unit of item # would be exchanged for one unit of item ", i.e. that a person in

$$

& days labour F days labour

H days labour G days labour


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country $ with a single unit of # could sell it to someone in country in return for a

single unit of ", and vice versa.

In this example trade will still benet both countries because country $ has a

comparative advantage in the production of item # (it can produce a unit of item #

in fewer days than it takes to produce item ") while country has a comparativeadvantage in item ". If country $ makes and exchanges a unit of # in return for a

unit of " from country then it obtains for an outlay of & days labour an item that

would re!uire F days labour if it were produced at home. 3!ually, country benets

from the transaction as it receives for a cost of G days labour an item that would

need H days if produced domestically. 5ence trade is protable for all concerned.

#lthough fascinating, 9icardo*s solution rests on the severe assumptions that

+irms in country cannot move their operations to country $ where both

items can be produced at lower cost.

Dnly the amount of labour used in production determines the cost of an item.

0his ignores the impact of technical advances on the use of capital

e!uipment.

Items exchange for each other at a predetermined and constant ratio.

#lso, the theory does not explain why certain goods are cheaper in certain

countries. 0his issue was addressed by 3. 5eckscher and ". Dhlin in the $%&Ls.

9 &he 6eckscher07hlin theory of international trade

#ccording to the 5eckscher-Dhlin theory, goods prices dier because productioncosts dier, and production costs themselves depend on the amount and costs of

labour, capital and natural resources used when making various products. 3ach

country possesses a specic mix of labour, capital and other *factor endowments*

some have abundant supplies of labour; others are rich in natural resources, etc. If

an item embodies a large amount of labour, and if labour is cheap and plentiful in

the producing country, then that product will be cheap by international comparison

and thus likely to be exported to the rest of the world. In general, a country will

export those items which incorporate relatively large amounts of its most abundant

factor, and import those products which include relatively small amounts of the

factor with which it is least endowed. In other words, dierences in factor

endowments determine dierences in comparative advantage, which themselves

shape the pattern of international trade.

Em'irical 'erformance of international trade theories

0he comparative cost, 5eckscher-Dhlin and other hypotheses relating to

international trade have been tested extensively and, alas, no rm conclusions have

emerged. Indeed, much empirical evidence atly re/ects the fundamental

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propositions of these theories. 3xtensions and modications of conventional

international trade theory have led to increasingly complex models, which

themselves give rise to further problems and contradictory results.

+actors that might confound orthodox trade theories include

a) 0he rapid pace of technological development, which causes national advantage

to shift fre!uently and in unpredictable ways.

b) 'kilful marketing that can increase foreign demand for relatively expensive

exported goods.

c) Covernments regularly seeking to improve national balance of payments

positions via the imposition of taris, import and exchange controls, etc.

d) 0he fact, that trade theories regard nation states as independent trading units.

In reality large multinational companies shift goods, services and capital among

their subsidiaries in various countries at prices !uite dierent to those at which arm in one country would sell to a customer in another.

e) :oorer countries often having national economic development plans which

encourage the importation of capital goods that otherwise would not have a market

in these nations.

f) 1ultinational companies fre!uently shifting from exporting to particular countries

to local production in those countries.

g) 'parcity and inaccuracy of the information upon which rms base their

international trading decisions.9 &he $ork of (ichael Porter

Dbserving that traditional economic theories fail to explain why certain

countries have succeeded in the post-'econd ?orld ?ar era, 1. 3. :orter put

forward a fresh hypothesis concerning the basic determinants of the national

competitive advantages that lead to international trade. :orter*s analysis begins

from the following propositions

a) 0he capacity to automate complete production processes means that workforce

costs and competencies are not as critically important to successful operations as

they once were.

b) ompanies today are increasingly international in outlook and able to shift

operations from country to country at will.

c) 0he rise of the multinational corporation has broken the link between corporate

eciency and the !uality and availability of resources (labour, capital, etc.) within

$&


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the rm*s own country. #n 14 is not dependent on the resource base of /ust one

nation; it operates wherever and whenever conditions are favourable.

d) 0he workforces and capital market arrangements of many industriali2ed countries

are today broadly comparable, so that companies have greater choice over where

they can locate activities. 5ence the pressures of supply and demand will tend inthe long term to e!ualise the costs of skilled labour and capital in these countries.

0oday, automated e!uipment can easily be substituted for labour, and modern

technology enables the creation of synthetic substitutes for expensive raw

materials.

0hese new realities, :orter argues, mean that rms need constantly to seek new

sources of competitive advantage. In particular they need to operate internationally

in order to ne-tune their competitive strengths and to identify and then remove

weaknesses. 'elling to the most demanding consumers causes a rm to achieve

!uality and service levels it would not otherwise attain. 0he key determinant of

contemporary national competitive advantage, :orter suggests, is product andprocess innovation - not cheap labour or an abundance of natural resources. Indeed,

lack of the latter can actually spur a country to a high level of technological

innovation.

#ccording to :orter, six sets of variables determine a nation*s ability to compete

internationally, namely

$) @emand conditions the strength and nature of domestic demand; consumer

desires, perceptions and levels of sophistication.

) +actor conditions skilled labour, road and rail infrastructure, natural resources,

etc.

&) +irm strategy, structure and rivalry the organisation and management of

companies and the extent of domestic competition.

F) 9elated and supporting industries extent of supply industries, ancillary business

services, input component manufacturers and so on.

G) Covernment policies, including rules on business competition, state intervention

in industry, regional development, health and education and (importantly)

vocational training.

H) =uck and chance.

:orter analysed data on the world*s ma/or industrial and trading nations and arrivedat the

following conclusions

a)=ack of national resources (e.g. of oil, labour, minerals, etc.) can spur a country to

a high level of innovation.

$F


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b) 0o be successful nations must move from having factor-driven to having

investment-driven economies, followed by a further move to an innovation- driven

economy. 0he latter contrasts with the *wealth-driven* economies of certain

countries, which have complacent businesses and are in decline despite per capita

C@: continuing to rise.

c) 0he creation of domestic monopolies through mergers and takeovers creates

moribund economic environments that are not conducive to innovation; even

though domestic monopolies may have to compete ercely on the international

level.

d) 4ations with governments that have been heavily involved with industries have

generally been the least successful.


16/28

and is impacted by numerous and often-changing factors. 0rade cannot be

explained neatly by one single theory, and more importantly, our understanding of

international trade theories continues to evolve.

TEORIES O' INTERNATIONAL IN&ESTMENT

+9 &he 'roduct life cycle theory of international investment

0he product life cycle (:=) hypothesis asserts that, like people, products are

conceived and born, mature, decline and eventually die. 5ence, a product has a *life

cycle* comprising a series of stages. 0he introductory phase is characteri2ed by high

expenditures (for market research, test marketing, launch costs, etc.) and possibly

by nancial losses. 3arly customers will be attracted by the novelty of the item.

0ypically, these customers are younger, better educated and more aSuent than the

rest of the population. 4o competition is experienced at this stage. 0here is

extensive advertising during the introduction, the aim being to create product

awareness and loyalty to the brand.

0here should now follow a period of growth, during which conventional consumers

begin to purchase the product. ompetition appears at this stage. 0hen the product

enters its maturityphase. 5ere the aim is to stabilise market share and make the

product attractive (through improvements in design and presentation) to new

market segments. 3xtra features might be added, !uality improved, and distribution

systems widened. ompetition intensies; appropriate strategies now include extra

promotional activity, price cutting to improve market share, and nding new uses

for the product. 3ventually, the market is saturated and the product enters its phase

of decline.:ublic tastes might have altered, or the product may be technically

obsolete. 'ales and prots fall. 0he product*s life should now be terminated,otherwise increasing amounts of time, eort and resources will be devoted to the

maintenance of a failing product.

It could be, however that, a product that has reached the end of its life cycle in one

country may have a fresh lease of life elsewhere. Indeed, =. 0. ?ells advanced the

theory that product life cycles explain the pattern of direct foreign investment in

developing countries by western 14s. #ccording to the argument, an item is

introduced to a developing country and, at rst, has little or no serious competition.

0hen the product is imitated by local suppliers so that several companies now sell

the item. 5ence, product dierentiation viathe addition of new features, provision

of service facilities, etc., becomes necessary in order to secure a competitive edge.=ocal competitors might even improve upon the product and begin to export their

versions of it to the originating rm*s own country. ompetition intensies, and price

cutting occurs until the product is no longer protable for the foreign exporter to

supply. 4ote how foreign imitators might en/oy lower labour and other local

production costs, and spend nothing on new product development. 0he exporter

conversely has to pay transport costs plus import duties. 0hus the exporting

$H


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company is likely to establish its own local manufacturing facilities in order to be

able to compete on price with local rms. #lso it must !uickly create a strong brand

image and eective communications with agents and distributors *in the eld*. 0hus

direct foreign investment (@+I) in less developed economies by rms from richer

nations was the only way they could compete against locally based low-cost

imitating businesses.

3mpirical evidence tended to support this theory during the $%GLs and early $%HLs,

but not thereafter, possibly for the following reasons

a) 4ew product innovation is today so rapid that product life cycles are too short for

it to be worthwhile establishing foreign production facilities dedicated to a particular

item.

b) #lthough rms in less developed countries may be able to produce products

cheaper than western rivals they cannot necessarily transport, market and

distribute them eciently.

c) In practice, 14s often launch new products in developed and underdeveloped

countries simultaneously.

d) 14s fre!uently choose low-cost countries as production sites for the worldwide

sale of a good, i.e. no production occurs in economically advanced nations.

e) #s alternatives to @+I, ?estern rms may engage in licensing or contract

manufacturing in order to produce goods in less developed countries.

0here are, moreover, a number of fundamental problems with the basic :=

hypothesis itself. 0he length of life of a new product cannot be reliably predicted inadvance, and many products cannot be characteri2ed in life cycle terms (basic

foodstus, or industrial materials for instance). Importantly, variations in marketing

eort will aect the durations of life cycle phases and determine the timing of

transitions from one stage to the next. :roducts do not face inevitable death within

predetermined periods the termination of a product*s life is very much a

management decision. In many cases a product*s lifespan may be extended by

skilful marketing. #lso, management can never be sure of the phase in its life cycle

in which a product happens to be at a particular time. 5ow, for instance, could

management know that a product is near the start and not the end of its growth

phase, or that a fall in sales is a temporary event rather than the start of a product*s

declineT

0he expected demise of a product can become a self-fullling reality; management

may assume wrongly that sales are about to decline and conse!uently withdraw

resources from the marketing of that product. 5ence, in the absence of advertising,

merchandising, promotional activity, etc., sales do fall and the product is

withdrawnU Oet another problem is the enormous number of (sometimes random)

$J


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factors that can inuence the durations of phases, turning points and levels of sales.

ompetitors* behavior may be the primary determinant of the rm*s sales,

regardless of the age of the product.

. (arket im'erfections and mono'olistic advantage theories

0hese assert that large rms engage in international business in order to create

near monopoly conditions for their operations. 0hus, for example

ross-border patent licensing agreements carve up foreign markets and

prevent competition in relation to the patented item.

+oreign production in countries with very low labour and other costs followed

by the export of the resulting output to the parent company*s home nation

enables the company to undercut its domestic competitors and drive them

out of business.

#c!uisition of foreign sources of raw materials and6or other inputs or offoreign distribution outlets means that the rm *internalises* the entire

procurement, supply and distribution system within a single organisation,

hence reducing uncertainties and risks and restricting competition.

1ore generally, *imperfections* in foreign market conditions are said to explain

international investment by companies. 'tephen 5ymer, for example, has argued

that rms only invest abroad if they have attributes not possessed by local foreign

rivals and there are barriers (*market imperfections*) that prevent these rivals from

obtaining the attributes of the foreign company. #ttributes could relate to

economies of scale in production, marketing or organi2ational management skills;

preferential access to nance or raw materials; or the use of a superior technology.

0hese advantages must be of a magnitude sucient to oset the costs of operating

abroad (need to conduct research into the local market, foreign exchange risks,

transport costs, etc.) and, subse!uent writers have suggested, may be *rm

specic*, *ownership specic*, or *location specic*.

Dwnership-specic factors relate to such matters as the extent of a company*s

share capital, receipt of government grants and subsidies, and proprietary rights

over intellectual property. =ocation-specic advantages include low prices for locally

purchased inputs, low transport costs, easy communications, availability of local

business support services (advertising agencies, market research rms, etc.), askilled and low-cost labour force, and the avoidance of trade restrictions imposed by

the host country government in order to reduce imports. Dther relevant factors are

market si2e and rate of growth and the extent of local competition. 3xamples of

rm-specic advantages are the ownership of well-known brands, special marketing

skills, attractive product features, patents, economies of scale or access to capital

markets.

$


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9 3unnings eclectic theory of international 'roductionAohn @unning*s *eclectic theory* of foreign investment asserts that the likelihood of a

rm investing abroad depends essentially on rm-specic factors, location-specic

factors that make it advantageous to invest in a particular country, and

*internali2ation* advantages which cause the internal transfer of labour, capital and

technical knowledge within the rm to be more cost- eective than using outsiders,

such as licensees, import agents, distributors and so on.

%nternali2ation#rguably, rms invest directly in other countries in order to cut out the use of

(expensive) suppliers and distributors. 5ence all stages in the supply process are

brought under a common ownership so that the full benets of research and

development can be obtained (by avoiding the use of licensees), and working

capital better utili2ed. #lso foreign government import regulations might be avoided

through producing in a local subsidiary rather than exporting direct. #ll aspects of

marketing will be controlled by the supplying rm, and there are no intermediate

sales or value added taxes. Knowledge can be transferred around the company atwill. 4ote however that extra costs have to be incurred by a rm that does things for

itself rather than using outsiders. Internal communication and administration costs

increase and there are additional costs associated with having to operate in

unfamiliar environments.

Problems $ith theoretical models of 3F%?hile interesting in themselves, none of the models previously outlined is

suciently general to explain all aspects of the foreign investment behaviour of

international companies. 3ach theory purports to give reasons for certain

investment activities, but contradictory evidence can be advanced against all of

them in certain circumstances. 0he theories are partial and incomplete and adoptdierent ideological perspectives. In particular, these theories tend to ignore the

inuences of the psycho-social and other human aspects of international

managerial behaviour, and of the governments of nation states. 0heories of

international investment sometimes contradict each other, and should really be

regarded as *opinions* rather than as theories capable of empirical verication.

#rguably, moreover, the eld of international business is so complex and fast

changing and covers so many disparate elements that no general theory can be

valid for very long.

$%


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International buine 2o$)etiti3e 'or2e A 2o$)arati3e anal#i

5bsolute and Com'arative 5dvantage

omparative advantage emphasi2es nationally 7endowed8 factors, dierences ininternational technology6productivity, external economies, and international

policies. omparative advantage focuses on the relative productivity dierences.

0he literature on international trade and policy contains a number of reasons why a

country may have an advantage in exporting a commodity to another country. +or

convenience, most of these reasons may be classied into ($) technological

superiority, () resource endowments, (&) demand patterns, and (F) commercial

policies.

&echnological #u'eriority#dam 'mithEs principle of 7absolute advantage8 and @avid 9icardoEs principle of

7comparative advantage8, in general, are based on the technological superiority of

one country over another country in producing a commodity. #bsolute advantage

refers to a country having higher (absolute) productivity or lower cost in producing a

commodity compared to another country. 5owever, absolute advantage in the

production of a commodity is neither necessary nor sucient for mutually benecial

trade. +or example, a country may be experiencing absolute disadvantage in the

production of all commodities compared to another country, yet the country may

derive benets by engaging in international trade with other countries, due to

relative (comparative) advantage in the production of some commodities vis-V-vis

other countries. =ikewise, absolute advantage in the production of a commodity is

not sucient, since the country may not have relative (comparative) advantage inthe production of that commodity. @avid 9icardoEs principle of comparative

advantage does not re!uire a higher absolute productivity but only a higher relative

productivity (a weaker assumption) in producing a commodity. :re-trade relative

productivities6costs determine the pre-trade relative prices. :re-trade relative prices

in each country determine the range of possible terms of trade for the trading

partners. #ctual terms of trade within this range, in general, depend on demand

patterns, which, in turn determines the gains from trade for each trading partner.

0he 9icardian model assumes constant productivity, as there is only one factor of

production (labour), and therefore constant (opportunity) costs that leads to

complete speciali2ation. 5owever, increasing opportunity costs that often arise inmulti-factor situations (law of diminishing returns) due to limited !uantity of some

factors specic to an industry can easily be accommodated to allow for incomplete

speciali2ation. 0hus, in the 9icardian model, technological dierences in two

countries are the ma/or source of movement of commodities across national

boundaries.

L


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?hile the principle of comparative advantage as expounded by @avid 9icardo was

couched in terms of technological superiority, the principle, when phrased in terms

of comparing opportunity cost or relative prices of goods and services between

countries is suciently general to encompass a variety of circumstances.

+urthermore, although 9icardoEs explanation of comparative advantage was in static

terms, comparative advantage is a dynamic concept. # countryEs comparativeadvantage in a product can change over time due to changes in any of the

determinants of comparative advantage including resource endowments,

technology, demand patterns, speciali2ation, business practices, and government

policies.

*esource Endo$ments#vailability of resources in a country provides another source of comparative

advantage for countries that do not necessarily possess a superior technology.

Nnder certain restrictive assumptions, comparative advantage can be obtained due

to dierences in relative factor endowments. #s propounded by 5ecksher and Dhlin,

a country has a comparative advantage in the production of that commodity whichuses the relatively abundant resource in that country more intensively. +or example,

newsprint uses natural resources (forest products) more intensively compared to

textiles. 0extiles use labour (=) more intensively compared to newsprint. anada is

relatively abundant in natural resources (9) compared to India. (96=) anada W (96=)

India. 0his implies 9 will be relatively cheaper in anada as compared to India. 0hus,

anada has a comparative advantage in newsprint and will therefore speciali2e and

export newsprint to India. =ikewise, India has a comparative advantage in textiles

and will therefore speciali2e and export textiles to anada.

6uman skills: 5uman skills can also be considered a resource. ountries withrelatively abundant human skills will have a comparative advantage in products that

use human skills more intensively. ertain products such as electronics re!uire a

highly skilled labour force (such as engineers, programmers, designers, and other

professional personnel). 'uch products may gain comparative advantage in

countries (such as 0aiwan, 'ingapore, 5ong Kong) that are relatively better endowed

with such skilled labour. (Keesing, $%HH). Covernment policies aimed at better

education and training can create such an endowment.

Economies of #cale:3conomies of scale can provide comparative advantage bylowering production costs. 3xternal economies that operate by shifting the average

cost of rms downward can in fact occur due to an industrial policy or a proactiverole of the government in providing better infrastructure and6or a better educated or

trained labour force. 'uch economies of scale are consistent with 9icardian and

+actor :roportions models. 3conomies of scale (internal) achieved through the

existence of a large home market and6or some policy-induced accessibility to a

larger market outside the nation (say due to a customs union) also imply lower

production costs. 0his may boost or create a comparative advantage for the

industry experiencing such economies of scale.

$


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&echnological )a' @eneAts of an Early #tartB and Product Cycle Industrially

advanced nations in general had an early start in most manufactured products and

services, which allowed them to en/oy large national and international markets.

Industrially advanced nations were thus able to export new products until such time

that the products were produced by other low factor cost countries. BernonEs ($%HH)

:roduct ycle hypothesis emphasi2es the importance of the nature and si2e ofhome demand for new products in highly industriali2ed countries. 'ince, initially, the

new product involves experimentation of the features of the product as well as the

production process, the countries that have sucient home demand for such

products produce and export them. #s the specic nature of demand becomes more

universal and the technology more easily available to others, the nation loses

comparative advantage in that product. 1eanwhile, the rms are likely to have

developed another product that enables the nation to gain comparative advantage

in that product.

3emand Patterns: 3emand Considerations

0he role of demand and the si2e of the home market for products are already

evident in ($) establishing the e!uilibrium terms of trade and therefore the division

of gains from trade; () economies of scale; and (&) product cycle hypothesis. In

addition, =inder ($%H$) emphasi2ed the role of demand in the home market as a

stepping stone towards success in international markets. #ccording to =inder,

manufacturers initiate the production of a new product to satisfy the local market. In

this step, they learn the necessary skills for making the product by more ecient

techni!ues, which in turn, give these nations comparative, advantage in the product

vis-V-vis other countries. =inderEs thesis postulates exporting the product to

countries with similar tastes6demand patterns. 0he theory, coupled with market

imperfections and product dierentiation can explain a large portion of intra-

industry trade among the industriali2ed nations.

8ational and %nternational Policies

4ational policies towards infrastructure, export promotion, education and training,

9>@ policy related to export industries can go a long way in creating and sustaining

comparative advantage. Industrial policies such as production subsidies, tax

preferences, restricted tendering of Covernment contracts, anti-trust policy, and a

number of other means are often used to provide an advantage to domestic

industries. =ikewise, the commercial policies aimed at restricting imports throughtaris, !uotas, voluntary export restraints, import licensing, local content rules,

restriction on outsourcing, escape clauses, etc. have been used to the advantage of

domestic import competing industries. :olicy driven benets reali2ed by the

industries through internal and6or external economies, in the long run, may become

a source of comparative advantage to these industries. 0he $%HG #uto-:act

between anada and the N'# is a good example of targeting individual industries to

inuence production and trade through national policies. 0he trade creation and


23/28

trade diversion eects of customs unions6free trade areas are well known in the

literature. +urther, the policies pursued by international organi2ations such as the

?orld "ank, the I1+ and the ?0D can also become a source of comparative

advantage6disadvantage to some industries in countries aected by such policies.

3ynamic )ains Com'arative 5dvantage

International trade, through a better allocation of resources, increases incomes,

saving, and investment, thus enabling a country to reali2e higher growth even in

fully employed economies. In addition, for developing countries, trade can enable

them to transform consumption goods and raw materials into capital goods as well

as gain technological know-how from technologically advanced countries. 0rade can

also provide demand stimulus to the lagging (excess capacity of some factors of

production) economies. +urthermore, speciali2ation through trade benets not only

the export industry, but all other industries (through increased demand for their

products) related to the export industries. =astly, by increasing the si2e of national

market and thereby the si2e of production facilities, domestic rms can reap both

external and internal economies of scale. International trade also implies more

competitive pressures on domestic rms that stimulate research and development.

#ll these considerations yielding comparative advantage to the nation may be seen

as a framework of a number of forces that can be portrayed. Dbviously, the rms

speciali2ing within the industries that have comparative advantage are on a much

stronger footing to derive competitive advantage in producing standardi2ed or

dierentiated products within that industry. In this framework, technology,

resources, demand and the trade-enhancing policies are depicted as four forces

inuencing the comparative advantage of a nation in a commodity6service vis-V-vis

other countries. @ynamic elements inuencing comparative advantage are alsoincluded in these forces.

Co$)etiti3e a63anta%eabolute a63anta%e

ompetitive advantage relies heavily on the rm-specic factors such 7created8

factors, 7created8 demand for the product, and internal economies achieved

through innovation. 'mith oered a new trade theory called absolute advantage,

which focused on the ability of a country to produce a good more eciently than

another nation. #bsolute advantage looks at the absolute productivity.

:orter ($%G) emphasi2ed competitiveness at the level of a rm in terms ofcompetitive strategies such as low cost and6or product dierentiation. # number of

writers on competitive advantage have focused on the determinants6sources of

competitive advantage such as important attributes of the rm rareness, value,

inability to be imitated, and inability to be substituted ("arney, $%%$); important

potential resources classied as nancial, physical, legal, human, organi2ational,

informational, and rational (5unt and 1organ, $%%G); ability in developing superior

core competencies in combining their skills and resources (:rahalad and 5amel,

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$%%L); a set of dynamic capabilitiesRcapabilities of possessing and allocating and

upgrading distinctive resources. =uo (LLL). # number of studies have also analysed

the role of individual factors such as intellectual property rights, trade secrets, data

bases, the culture of organi2ation, etc. (5all, $%%&), ethics capability ("uller and

1c3voy, $%%%), corporate reputation (=/ubo/evic, LL&), diversity in workplace

(=attimer, LL&) and corporate philanthropy (:orter and Kramer, LL). 0he centralfocus of these contributions is still on rm-specic factors of competitive advantage.

PorterDs 8ational Com'etitive 5dvantage &heory

:orter identied four determinants that he linked together. 0he four determinants

are ($) local market resources and capabilities, () local market demand conditions,

(&) local suppliers and complementary industries, and (F) local rm characteristics.

$. Local market resources and ca'abilities @factor conditionsB9 :orter

recogni2ed the value of the factor proportions theory, which considers a nationEs

resources (e.g., natural resources and available labor) as key factors in determiningwhat products a country will import or export. :orter added to these basic factors a

new list of advanced factors, which he dened as skilled labor, investments in

education, technology, and infrastructure. 5e perceived these advanced factors as

providing a country with a sustainable competitive advantage.

. Local market demand conditions9 :orter believed that a sophisticated home

market is critical to ensuring ongoing innovation, thereby creating a sustainable

competitive advantage. ompanies whose domestic markets are sophisticated,

trendsetting, and demanding forces continuous innovation and the development of

new products and technologies. 1any sources credit the demanding N' consumer

with forcing N' software companies to continuously innovate, thus creating asustainable competitive advantage in software products and services.

&. Local su''liers and com'lementary industries90o remain competitive, large

global rms benet from having strong, ecient supporting and related industries

to provide the inputs re!uired by the industry. ertain industries cluster

geographically, which provides eciencies and productivity.

F. Local Arm characteristics9 =ocal rm characteristics include rm strategy,

industry structure, and industry rivalry. =ocal strategy aects a rmEs

competitiveness. # healthy level of rivalry between local rms will spur innovation

and competitiveness.

In6utr# anal#i an6 tru2ture

"usiness strategy involves identifying and exploiting the resources and capabilities

of the rm in the marketplace for the purpose of gaining competitive advantage and

superior nancial performance. Inherent in this denition is the need to continuously

renew these resources and capabilities, to determine a set of goals and ob/ectives

F


25/28

for the enterprise when it does gain competitive advantage, to understand the

structure of the marketplace and of the competitive situation faced by the rm, and

to devise, assess, and choose among a set of strategic options for the rm. # fully

developed strategy must also be suitable to the macro-environment of the

enterprise and must develop organi2ational solutions to execute otherwise abstract

plans.0he ma/or aspects of strategy analysis include setting goals and ob/ectives,

performing competitive and industry analysis, analy2ing resources and capabilities,

developing strategic options, choosing a strategy, and implementing that strategy,

with feedback loops among all the processes.

0he 'trategic #nalysis :rocess

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International business involves a specic set of issues whose strategic resolutionties into the generic strategic analysis and involve ($) increasing geographic spread

(often referred to as Xinternationali2ationE), () achieving local adaptation (often

referred to as XresponsivenessE), (&) building global integration (sometimes referred

to as Xglobali2ationE or Xglobal strategyE), and (F) multi-business, multi-country, and

often multi-rm issues such as international strategic alliances and global mergers

and ac!uisitions.

International 'trategy Issues

H


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#lthough the last international issue of multi-business6multi-rm6multinational

moves tends to re!uire heavy emphasis on all ve strategic analysis processes. ?e

see heavy reliance on goal setting, industry analysis, and resource assessment as

rms expand internationally. #daptation and integration are driven largely by issues

developed through competitive analysis and resource assessment, while integration

must also consider issues revealed by dierent means of assessing strategicconditions and opportunities.

*esources and Ca'abilities for )eogra'hic #'read

0he concept of resources and capabilities developed in the strategy literature (e.g.?ernerfelt, $%F; Crant, $%%$) applies very well to the international strategy issueof geographic spread. ompanies that own or access uni!ue resources andcapabilitiesRdemonstrating uni!ue core competencies in 5amel and :rahalad*stermsRnd that international expansion gives them vast new opportunities toleverage these expensive and valuable skills

*isk and *eturn in %nternational #trategy

#nother consideration in international expansion is risk reduction, whether nancial,business, or environmental. International expansion oers the opportunity to moveinto markets that are not perfectly in phase with the home market.

%ndustry and Com'etitor 5nalysis for )eogra'hic #'read

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lassic industry and competitor analysis (:orter $%L and $%G) can be applied togeographic spread. +irms usually need an initial competitive advantage that theycan leverage into international markets.0hen, in addition to the initial competitiveadvantage, companies need to conduct classic industry analysis in each market, asby using :orter*s ($%L) ve forces framework to establish for each potential foreign

market what the likely prospects are for above average returns.

%ndustry structure analysis W5 &erm 'a'er

bbm_475_notes_introduction_to_internatio.docx

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