International BusinessIntroduction to International Business

Exercise•Describe how international business has affected you

in your daily life.

Think about who made the clothes you’re wearing, what type of food you ate for breakfast or lunch (muesli cereal, sushi, Italian-style coffee), what type of cell phone you have and where it was made, where your car was designed and manufactured, where the components for your computer were manufactured, and so on.

•Why (or why not) are so many of the products you use made abroad? Which are the ones made abroad? (Think about an integrated world economy vs. distinct national economies)

Case: Wal-mart’s global expansion•Largest retailer in the world –Over 4500 stores• International expansion in 1991begins with Mexico

in response to market saturation in the US• Localization strategy adopted after trial and error•Global buying power has allowed it to reap

economies of scale •Wal-mart faces significant competition from other

global retailers, but has the first mover advantage in some markets

Introduction

Globalization is the ongoing process that deepens and broadens the relationships and interdependence among countries.

Also, “Integration of world economies through the reduction of barriers to the movement of trade, capital, technology and people.”

International Business is a mechanism to bring about globalization.

•Two components:▫The globalization of markets▫The globalization of production

International Business

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

Increasingly foreign countries are a source of both production and sales for domestic companies

Lets take a Global example!!!

•“KIA SORENTO”, a Korean car!!Let’s discover it:

“JAPANESE” firm Matsushita furnishes its CD player;

Optical pick-up units in “CHINA”;

Send them to “THAILAND” for mechanical structure;

Story continues……Transport semi-finished product to “MEXICO” for

final assembly;

Trucks CD players to a US port

Finally; shipped to Kia’s SOUTH KOREAN factory for installation and then marketed around the world.

What you call the entire circle??

FACTS speak!!

•“About 25 percent of world production is sold outside its country of origin, as

opposed to about 7 percent in 1950.”

A Framework

POLICY-

STRATEGY

(INTERNATIONAL)COMPETITIVENESS

FIRMS(Business,Competitive)

GOVERNMENTS(Competition,

Industrial)

THEORY

International Business

o International business can be defined as activities that buys and sells goods and services across two or more national boundaries, even if the management is located in a one country. It includes any type of business activity that crosses national borders.

o International business is related with those enterprises which have operating units outside their own country. There are institutional arrangements who provide some managerial direction of economic activity taking place abroad.

o Conducting international business is really not like playing a whole new ball game but it is like playing in a different ball park, where the managers have to learn the factors unique to the playing field.

o The guiding principles of a firm engaged in international business activities should incorporate a global perspective. Incorporating an international outlook into the firm’s basic statement will help focus the attention of management on the opportunities outside the domestic economy.

The Nature and Scope of International Business • International Business (IB) deals with the nature,

strategy and management of international business enterprises and their effects on business and national performance (e.g., efficiency, growth, profitability, employment).

• IB is interdisciplinary. It draws, among others, on economics, politics, sociology, marketing, management (human resources, strategic).

Origins of IB • IB is the result of the internationalisation of

production and the emergence of the multinational corporations (MNCs), the subject matter of IB.

• Internationalisation of production (‘globalization’) involves international capital flows, international trade of commodities (exports-imports) and Foreign Direct Investment (FDI) by MNCs.

Origins of IB • Until the 1980s, there has been a tendency towards

concentration of industry, and oligopolistic market structures. Firms have observed a ‘law of increasing size’ consisting of four stages:▫First, the owner managed and controlled small firm

(nineteenth century).▫Second, the public limited ‘national’ company (limited

liability, separation of ownership from management).▫Third, the multidivisional (M-form) organisation (division-

based), separation of strategic (long term) and operational (day-to-day) decisions.

▫Fourth, multinational corporations (MNCs) with production activities outside (and including) their home-base.

Scope : “World is turning into a Global village”.

“SMOOTH”1. Source raw materials wherever they are cheapest.2. Manufacture anywhere in the world where it is most cost effective.3. Obtain and Sell in those global markets where the returns are

highest.4. Organize and Raise finances globally.5. Try and Forge international strategic alliances.6. Hire the best talent from all over the world. To manage all the

above points.And then will have achieved the stature of a true Global Organization

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Studying International Business is Important•Most companies are either international

or compete with international companies.•Modes of operations may differ from

those used domestically.•The best way of conducting business may

differ by country.•An understanding helps you make better

career decisions.•An understanding helps you decide what

government policies to support.

Objectives of International Business1. To integrate economies.

2. To offer new markets.

3. To facilitate transfer of ideas, services/ products and capital across the world.

4. To facilitate mobility of factors of production.

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Reasons to Engage in International Business

• To Expand Sales: pursuing international sales increases the potential market and potential profits

• To Acquire Resources: may give companies lower costs, new and better products, additional operating knowledge

• To Diversify or Reduce Risks: international operations may reduce operating risk by smoothing sales and profits, preventing competitors from gaining advantage .

Lets enumerate reasons for Corporate & Government to go GLOBAL!!!!!

Reasons for Growth of IB▫ Expansion of technology—transportation and

communication are quicker and less costly

▫ Liberalization of cross-border movements• Government barriers reduced because:

– desire for better access to greater variety of goods and services

– domestic producers forced to be more competitive– lowered trade barriers to their own exports

▫ Development of supporting services by business and governments to:

• Ease the flow of goods and services sold abroad• Reduce risks of IB

Contd.• Growing consumer pressures

• Increased global competition

• Changing political situations

• Expanded cross-national cooperation and Competitiveness

What’s Wrong with Globalization

•Threats to sovereignty

•Economic growth and environmental stress

•Growing income inequality and personal stress

•Off shoring – the transferring of production abroad – is controversial in terms of who benefits when costs are reduced and whether the process exchanges good jobs for bad ones.

International OrganizationFactors determining the International Organization

• Extent of commitment to International Business

• Nature of International Orientation

• Size of International Business & Expansion Plans

• Number and Consistency of Product lines

• Characteristics of the Foreign Markets

Modes of Entry in International Business• Merchandise exports and imports• Service exports and imports

▫ Tourism and Transportation▫ Service Performance▫ Asset Use

• Investments ▫ Foreign Direct Investment (FDI)▫ Portfolio Investment

• Contract Manufacturing : Strategy of identifying a manufacturing unit to produce items at a competitive price in any part of the world. Eg. Nike is procuring its athletic footwear in a number of factories in Southeast Asia.

• Contract Marketing: Here the manufacturing companies enter into marketing agreement with outlets like TESCO, Wal-Mart, K Mart, etc. Various Indian companies are contract marketers for German based medical equipments, dental care items and hearing aids.

• Management contracts-Agreement, for coordinating and overseeing a contract, is made between investors or owners of a project, and the hired management company. Thereby, it is an agreement between two companies where one company provides managerial and technical assistance. Computing management fees and the conditions and duration of the agreement is spelled out with any contributing methods.

• International Licensing- Foreign licensing agreements can help a small business expand its product lines into other countries when it lacks the ability to establish and manage foreign-based manufacturing operations.

• Turnkey operations- A situation in which a firm's high-level management plans and executes all business strategies to ensure that individuals can buy a franchise or business and only "turn the key" to begin operations. A turnkey business already has a proven, successful business model and merely requires investment capital and labour. Franchises are typically turnkey business, but any existing business that's already up and running successfully or a new business whose doors are ready to be opened could be considered a turnkey business. Journey from concept to completion.

• Subway's sandwich shops are an example of a turnkey business. The menu has already been developed, the stores have already been designed, the employees' uniforms have already been chosen, marketing is already in place and consumers are already familiar with the brand. To open a new Subway franchise, an individual only needs to pay start-up and operating costs for one store location, a franchise fee and ongoing royalty fees; he or she does not have to worry about the other major aspects of business development. Also, L&T, Hyundai, Mitsubishi etc.

• Use terms like BOT & BOOT.

Contd.

• Counter Trade- Goods are exchanged for other goods rather than hard currency.

--Pure Barter- Barter forms the oldest countertrade arrangement, and essentially involves the direct exchange of goods and services having an equivalent value, but with no cash settlement.

-- Counter purchase- the overseas seller agrees to buy goods or services sourced from the buyer's country up to a defined amount.

--Offset arrangement- the seller assists in marketing products manufactured by the buying country or allows part of the assembly of the exported product to be carried out by manufacturers in the buying country; this practice is often found in the aerospace and defence industries. 

• Joint Ventures• Mergers & Acquisitions• Strategic Alliance

Cooperation Strategies• Investments—ownership of foreign property in exchange for financial return

• Foreign direct investment—investor gains a controlling interest in foreign company.

-- mergers & acquisitions: The term merger refers to the integration of two previously independent organizations into a completely new organization; Acquisition involves the purchase of one organization by another for integration into the acquiring organization

-- joint venture: A joint venture could be considered as an entity resulting from a long term contractual agreement between two or more parties, to undertake mutually beneficial economic activities, exercise joint control and contribute equity and share in the profits or

losses of the entity.

--mixed venture

-- hostile takeovers• Portfolio investment—non controlling interest

• International Companies

▫ Multinational enterprise (MNE) —company with global approach to foreign markets and production

▫ Globally integrated company—integrates operations located in different countries

▫ Multi domestic company—foreign-country operations act fairly independently

• Collaborative arrangements- Types of operations opted to work as joint ventures, strategic alliances, licensing agreements, management contracts and long term contractual agreements.

• Strategic Alliance- Two or more firms unite to pursue a set of agreed upon goals, but remain independent subsequent to the formation of the alliance.

The partner firms share the benefits of the alliance and control over the

performance of assigned tasks – perhaps the most distinctive characteristic of alliances and the ones that makes them so difficult to manage.

The partner firms contribute on a continuing basis, in one or more key strategic areas, for example, technology, product and so forth.

Contd.

•Multinational Enterprises (MNEs) take a global approach to markets and production or one with operations in more than one country.

•“Born-Global companies”; can cover small companies with world wide view.

•Also referred to as multinational corporations or companies (MNCs) or transnational companies (TNCs).

Determinants of Business Entry Strategy1. Cost of Logistics2. Cost of Negotiation, Monitoring and Enforcement3. Comparative Advantages of (Developing Nations) a. Land b. Minerals / Raw Materials/ Climatic conditions c. Labour d. Untapped Markets / Need in Markets4. Comparative Advantage of (Developed Nations) a. Capital b. Technology c. Technical know-how d. Management expertise e. Market expertise – Segmentation, Niche etc

Reasons for Alliances/ M&A / Takeovers• Gaining access to global markets, technology, or other resources; and

achieving operational efficiencies, improved innovation, or resource sharing.

• Market entry• Possession of marketing infrastructure• Achieving economies of scale• Increasing the market power• Diversification• Acquisition of technology• Use of surplus funds

Contd.• Optimum utilization of resources and facilities• Product mix optimization• Pre-emptive strategy (to block competitor from acquisition)• Horizontal or Vertical integration• Tax benefits• Logistical factors• Acquisition of brands• Minimization of Risk• Regulatory factors

• As a result, M&A have become a preferred method for rapid growth and strategic change.

Future of International Business and Globalization

•Further globalization is inevitable.

•International business will grow primarily along regional rather than global lines.

•Forces working against further globalization and international business will slow down both trends.

Difference Between International and Domestic Operations

When operating abroad companies may have to adjust their usual methods of carrying out business.

Foreign conditions often dictate a more suitable method, and the operating modes used for international business differ from those used on a domestic level.

Domestic Vs International Business•Environment•Plan and Strategy•Competitive forces and their intensity•Currencies and their movements•Business risks•Research•Human resources•Organizational Vision and Objective

Contd.

•Product and usage•Legal aspects•Investment and sourcing•Pricing strategy•Distribution Channels•Promotion•Logistics

Assignment!!!

•Current trends with emphasis on Export & Import of India among emerging economies.

•Role of new emerging nations in Globalized village.

Risk analysis & its Management!!

Economic Technological

Social Political

Dimensions of Globalization

Risk Failures!!

•Enron Project failure in India

•American style of managing sales force didn’t work for Proctor & Gamble in Japan;

•Multi layer marketing of Amway did not work in South Korea;

International Business: Operations and Influences

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Physical and Social Factors Affecting International Business Operations

Competitive Factors Affecting International Business

Economic Environment Comprised of 3 broad categories:

• Home-country economyEconomic policies

Trade and Commercial policies

Promotional and Regulatory measures

• Host country economySize of the marketGDPIndustrializationFOREXIncome levelsEconomic diversityPurchasing powerBanking

• Global economy

Social Environment Determinants are:-

•National Taste•Language•Values and beliefs•Demography•Literacy rate•Female workforce•Double Income families•Impulse buying

Political Environment Varied dimensions:

•Home country

•Host country

•Global Political environment

Cultural Environment•Set of factors that shape the material and

psychological development of a nation.•Influence on individual lifestyle, attitude,

predisposition, and behaviours of consumers in the market.

•Culture is: LearnedInterrelatedShared

Additionally,

•Technological environment

•Legal environmentHome country lawsHost country lawsInternational laws

•Competitive environment

Here comes a CASE STUDY!!!!!!