intenational marketing business
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INTRODUCTION TO
GLOBALISATION ANDINTERNATIONAL
BUSINESS
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INTERNATIONAL BUSINESS AND
GLOBALISATION
International Business is defined as
(1)a cross- border economic activities and
(2)the action of doing business abroad.
Global Business is defined as business around
the globe. Global activities include both
(1) international (cross-border) activities covered
by IB and
(2) domestic business activities
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Globalization Globalisation is the trend toward greater
economic, cultural, political, andtechnological interdependence among
national institutions and economies. It is
characterised by denationalisation ( nationalboundaries becoming less relevant)
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Globalization of markets:The merging ofdistinct and separate national markets intoone huge global marketplace.
Benefits:
Reduces Marketing Cost
Creates New Market Opportunities
Levels Uneven Income Streams
Globalisation of Markets
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Globalization of Production The tendency among firms to source goods
and services from different locations around
the globe to take advantage of cost and
quality of factors of production such as
labour, energy, land and capital.
Benefits
Access to Lower-cost Workers
Access to technical Expertise
Access to Production inputs21/09/2013 5
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Drivers of Globalization1. Falling Barriers to Trade and Investment
- WTO (enforces rules on Intl trade)
- Regional Trade Agreements (eg. NAFTA,EU, APEC, ECOWAS)- smaller groups ofnations integrating their economies to fostertrade and boost cross-border investment
- Trade and National Output (indicators :GDP, GNP) Economic Growth is greater innations that have become more open totrade eg. China, India and Russia.
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Drivers of Globalization2. Technological Innovations although
falling trade barriers and investmentencourage globalisation, technologicalinnovation is accelerating the process.Advancements in information technology
and transportation methods are making iteasier to move data, goods and equipmentaround the world.
- E- mail and videoconferencing-operating
across borders and time zones complicatesthe job of coordinating and controllingbusiness activities. Technology can speed
the flow of information and ease the task ofcoordinatin and control.21/09/2013 7
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Drivers of Globalization cont.-Internet and World Wide Web
Companies use internet to quickly andcheaply to contact managers in distantlocations to eg inquire about production,sales, distribution and other issues.
- Intranets and Extranets
- Intranets give employees access tocompany data. Extranets on the other hand
gives suppliers, distributors and companycustomers access to companys database.
- Advancements in transportation
Technologies- reliance on shippedim orts ust-in-time deliver etc.21/09/2013
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The Globalization Debate
Globalisation means different thing to different
people. Impact of globalisation is perceived
differently.
(1)Globalisation Impact on Jobs
Against - groups opposing globalisation blame it
for eroding standard of living and ruining ways
of life. They argue that globalisation
eliminates jobs and
lowers wages in developed nations and
exploits workers in developing nations21/09/2013 9
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The Globalization Debate Cont.For- supporters of globalisation credits it with
improving standards of living and making possible new
ways of life. They argue that globalisation: Increases wealth and efficiency in all nations
Generates labour market flexibility in developed
nations
Advances economies of developing nations
(2) Globalisation Impact on Labour, Environments and
Marketscompanies will prefer to locate operations to
where labour and environmental regulations are leastrestrictive
Labour StandardTrade Unions claim globalisation
reduces labours bargaining power
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The Globalization Debate Cont.(3) Globalisation and Income Inequality
Inequality within Nations Inequality between nations
Global inequality
(4) Globalisation and National Sovereignty
National Sovereignty involves the idea that a
nation state is
(a)Autonomous
(b) Can freely select its government
(c) Cannot intervene in the affairs of other nations
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The Globalization Debate Cont(d) Can control the movements across its borders
(e) Can enter into binding internationalagreements. Opposition groups allege that
globalisation erodes national sovereignty
Globalisation: Menace to Democracy-empowers supernational institutions at the
expense of national govts (eg WTO, IMF, UN
are led by appointed and not democraticallyelected representatives)
Globalisation: Guardian of Democracy-
supporters argue that globalisation has led tothe s read of democrac worldwide e . Human21/09/2013 12
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The Globalization Debate Cont
(5) Globalisations Influence on Culture
Protesters argue that globalisation is
homogenising our world and destroying its rich
diversity of cultures.
Supporters argue that globalisation allows us toprofit from our differing circumstances and skills
Trade allows countries to specialise in producing
goods and services they can produce mostefficiently. Nations can then trade with each
other to obtain goods and services they desire
but do not produce.21/09/2013 13
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Forms of International Business
Class if ied in to th ree broad categories
Trade: (indirect/direct exporting,
importing) Temporal Contracts: (licensing,
franchising, management/manufacturingcontracts)
Foreign Direct Investments: MNCs, Jointventures, mergers/acquisitions,
Wholly Owned subsidiaries.
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International Trade and Business
International Trade occurs when a firm
exports or imports goods or services.
International business is broader in
context than international trade even
though it is sometimes used narrowly
to mean international trade. It embraces
all forms of business transactionsacross a firms national borders.
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THEORIES OF TRADE
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Theories of Trade Mercantilist Theory Absolute Advantage Theory
Comparative Advantage Theory
Factor Endowments Theory
Product Life-Cycle Theory
New Trade Theory
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Mercantilist Theory 16th Century concept. To export is good, to import is to be avoided.
Export brings about payment to you, import
means you make payment (gold or silver) The best thing to do is to export and receive as
much payment as possible and maintain a trade
surplus. (Trade is a zero-sum game)
This theory does not see any advantage inimporting. Eg. deprivation of some consumer
items.
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Critique David Humes (1752) point out an
inconsistency in this theory;
Trade surplus between Ghana and Togo
will swell the domestic money supply andwill lead to inflation, However, theoutflows will contract money supply inTogo and prices will fall.
Eventually, Ghana will be the loser till thesurplus even out.
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Critique Smith (1776) debunked Mercantilist theory as a
zero-sum game.
Countries differ in their ability to produce
goods efficiently. Ghana may have absolute advantage in the
growing of cocoa because of climatic and good
soil conditions and accumulated expertise.
France or Spain may have similar advantages
in the production of wine.
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Absolute advantage Theory
Countries should specialize inproducing goods for which they havean absolute advantage and trade these
goods for the goods produced by othercountries.
Smiths basic argument is neverproduce at home something you can getat lower cost in other countries.
To Smith, trade is a positive sum game
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Comparative Advantage Theory
Ricardo (1817) take Smiths theory to a furtherstep.
What if one country has the absolute advantageof producing all goods? Can it derive benefits
from trade? A country must specialize in goods it produces
efficiently and import those it produces lessefficiently from other countries even if it can
produce them. (Difference in productivity) Unrestricted trade brings about a win-winsituation.
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Critique The theory deals with too many assumptions.
Does not take transportation costs into
account;
Assumption that resources are equal in bothcountries;
Not taken exchange rates into account;
Does not explore the possibility of moving rawmaterials internationally.
Does not take diminishing returns into account.
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Factor Endowment Theory Also known as Heckscher-Ohlin Theory (1933)
Comparative advantage arises from nationalfactor endowments such as land, labour,capital.
Nations have different factor endowments andthat explains cost differences.
Nations will export those goods that makeintensive use of factors that are abundant
locally and import goods that make use offactors that are locally scarce.
In theory, it is preferred but not practically.
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LEONTIFF PARADOX
States that the US should export capital
intensive goods and import labour
intensive goods
However it was discovered that the US
imports were less capital intensive than
US exports
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Product Life CycleTheory
Production starts from the owner of thetechnologys country (introduction stage).
It serves home markets and later exports toother advanced countries. Growth for
domestic markets and introduction in thosecountries)
Other countries start production and marketsget choked.
Developing countries take advantage ofproduction costs and export to originalproducer.
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New Trade Theory The world market will profitably support few
firms that enjoy substantial economies ofscale in their various industries.
Countries or firms may export certainproducts simply because they were earlyentrants into that industry. First moveradvantages create a barrier to entry.
Economies of scale leads to specialization. Economies of scale also results in decreasein unit costs of production.
Companies may excel not as a result of
factorv endowment but because of first
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Key factors of New Trade Theory
New trade theorists argue that luck,
entrepreneurship and innovation are key in
giving a firm first mover advantage.
Government support systems are key indetermining these factors.
In most advance countries, government
absorb R&D costs of certain technologies
thereby making them more competitive on
the world market.
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Porter's Diamond of
National Advantage
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Porter's Diamond of National Advantage
Classical theories of international trade propose
that comparative advantage resides in the
factor endowments that a country may be
fortunate enough to inherit. Factor endowments
include land, natural resources, labor, and thesize of the local population.
Michael E. Porter argued that a nation can
create new advanced factor endowments suchas skilled labor, a strong technology and
knowledge base, government support, and
culture.
Porter's Diamond of National
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Porter s Diamond of NationalAdvantage Cont.
Porter used a diamond shaped diagram as
the basis of a framework to illustrate the
determinants of national advantage. This
diamond represents the national playingfield that countries establish for their
industries.
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P t ' Di d f N ti l
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Porter's Diamond of National
Advantage
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P ' Di d f N i l Ad C
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Porter's Diamond of National Advantage Con
The individual points on the diamond and the diamondas a whole affect four ingredients that lead to a
national comparative advantage. These ingredients
are:
the availability of resources and skills,
information that firms use to decide which
opportunities to pursue with those resources and
skills, the goals of individuals in companies,
the pressure on companies to innovate and invest.
The points of the diamond are described as
follows:21/09/2013 33
1 F t C diti
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1- Factor Conditions
Factor conditions refers to inputs used as
factors of production - such as labour, land,natural resources, capital and infrastructure.
This sounds similar to standard economic
theory, but Porter argues that the "key" factors
of production (or specialized factors) are
created, not inherited. Specialized factors of
production are skilled labour, capital and
infrastructure.
A country creates its own important factors
such as skilled resources and technological
base.21/09/2013 34
1 Factor Conditions Cont
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1- Factor Conditions Cont.
The stock of factors at a given time is less
important than the extent that they areupgraded and deployed.
Local disadvantages in factors of production
force innovation. Adverse conditions such aslabor shortages or scarce raw materials force
firms to develop new methods, and this
innovation often leads to a national comparative
advantage.
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2 Demand Conditions
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2-Demand Conditions
Porter argues that a sophisticated domestic
market is an important element to producingcompetitiveness. Firms that face a
sophisticated domestic market are likely to sell
superior products because the market demands
high quality and a close proximity to such
consumers enables the firm to better
understand the needs and desires of the
customers.
A more demanding local market leads to
national advantage.21/09/2013 36
2 Demand Conditions Cont
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2-Demand Conditions Cont.
When the market for a particular product is
larger locally than in foreign markets, the localfirms devote more attention to that product than
do foreign firms, leading to a competitive
advantage when the local firms begin exporting
the product.
A strong, trend-setting local market helps local
firms anticipate global trends.
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3 Related and Supporting Industries
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3-Related and Supporting Industries
Porter also argues that a set of strong related and
supporting industries is important to the
competitiveness of firms. This includes suppliers and
related industries. This usually occurs at a regional
level as opposed to a national level. Examples include
Silicon valley in the U.S., Detroit (for the auto industry)and Italy (leather-shoes-other leather goods industry).
The phenomenon of competitors (and upstream
and/or downstream industries) locating in the same
area is known as clustering or agglomeration. Whatare the advantages and disadvantages of locating
within a cluster? Some advantages to locating close to
your rivals may be21/09/2013 38
3 Related and Supporting Industries Con
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3-Related and Supporting Industries Con
potential technology knowledge spillovers,
an association of a region on the part of consumerswith a product and high quality and therefore some
market power, or
an association of a region on the part of applicable
labour force.
Some disadvantages to locating close to your
rivals are
potential poaching of your employees by rivalcompanies and
obvious increase in competition possibly decreasing
mark-ups.21/09/2013 39
4 Firm Strategy Structure and Rivalry
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4-Firm Strategy, Structure, and Rivalry Local conditions affect firm strategy. For example,
German companies tend to be hierarchical. Italian
companies tend to be smaller and are run more likeextended families. Such strategy and structure helps
to determine in which types of industries a nation's
firms will excel.
In Porter's Five Forces model, low rivalry made an
industry attractive. While at a single point in time a firm
prefers less rivalry, over the long run more local rivalry
is better since it puts pressure on firms to innovateand improve. In fact, high local rivalry results in less
global rivalry.
Local rivalry forces firms to move beyond basic
advantages that the home country may enjoy, such as21/09/2013 40
The Diamond as a System
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The Diamond as a System
The effect of one point depends on the others. Forexample, factor disadvantages will not lead firms to
innovate unless there is sufficient rivalry.
The diamond also is a self-reinforcing system. For
example, a high level of rivalry often leads to the
formation of unique specialized factors.
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Government's Role
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Government s Role
The role of government in the model is to:
Encourage companies to raise their performance, for
example by enforcing strict product standards.
Stimulate early demand for advanced products.
Focus on specialized factor creation.
Stimulate local rivalry by limiting direct cooperation
and enforcing antitrust regulations.
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Criticisms about The Diamond Model
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Criticisms about The Diamond Model
Although Porter theory is renowned, it has a number
of critics. Porter developed this paper based on case studies
and these tend to only apply to developed economies.
Porter argues that only outward-FDI is valuable in
creating competitive advantage, and inbound-FDI
does not increase domestic competition significantly
because the domestic firms lack the capability todefend their own markets and face a process of
market-share erosion and decline. However, there
seems to be little empirical evidence to support that
claim.21/09/2013 43
Criticisms about The Diamond Model
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Criticisms about The Diamond Model
The Porter model does not adequately address therole of MNCs. There seems to be ample evidence that
the diamond is influenced by factors outside the home
country.
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Other foreign market analysis
Other foreign market analysis include Country Attractiveness Approach Does
the environment of the country support our
product, 2) Will that country be the bestplace to operate?
Country Risk Approach What are the risk
to be considered in entering the market so
far as that particular country is concerned
Objective Analysis of Markets Does the
market under consideration help us to
meet our cor orate ob ectives?21/09/2013 45
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PREPARATION TO ENTER FOREIGN
MARKETS CONTINUATION
1)RESOURCE BASED VIEW THEORY
This is where a firm builds on the human
capacity to create competitive advantage.
This can be done through training andplacing value on employees.
Ask questions e.g. Does the firm have the
human resource needed for that businessenvironment?
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2)INTERNATIONAL MARKET
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2)INTERNATIONAL MARKET
RESEACH This is the systematic
design,collection,recording,analysis,interpretatio
na and reporting of information pertinent to a
particular marketing decision of an internationalcompany. It may include acquisition
analysis,diversification analysis,market share
analysis and export research
Companies must have market intelligence inorder to be abreast with the market and adjust
products and services to suit the various
markets.21/09/2013 47
2)INTERNATIONAL MARKET
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2)INTERNATIONAL MARKET
RESEACH continued
Includes research into brand
preferences,brand awareness,brand
attitudes,purchase behaviour and market
segmentation
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INTERNATIONAL MARKET
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INTERNATIONAL MARKET
SELECTION - continuation
MARKET SCREENING VARIABLES
These include cost factors
(transportation,wage,land,financing
costs,tax rates
Resource Factors Supplies,raw
materials,labour,transportation and
logistics Demand Factors Market size and
growth,customer base)
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PREPARATION TO ENTER
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PREPARATION TO ENTER
FOREIGN MARKETS The five stage selection process are
1)Domestic regulations and management preferences
2)Initial Entry assessment (which markets are of no
interest to the firm irrespective of its attractiveness)
3)Competitive Environment (Porters Five forces- whichmarkets should be avoided due to intense competititon)
4) Marketing responsiveness (which markets are not
responsive to our marketing tools,Demand pattern
analysis,international product life cycle, income elasticitymeasurement etc.
5) Internal trade off analysis What are the uncertainties
in that particular market or what may we loose as a
company when we operate in that market?