m 1 - international business - introduction

8/6/2019 M 1 - International Business - Introduction

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4.2 International Business

Ashish J. Shah

[email protected]

97400989522009 11


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Course Brief

Learning Methodology:

Interactive lectures

C

ase studies Other Class work - individual and group,

Home work individual and group

Assignments

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Course Agenda

1. Introduction to International Business

2. International Business Environment

3. Global Business Strategic Management

4. Exim Trade

5. Control & Evaluation of InternationalBusiness

6. Conflict in International Business andNegotiations

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Assessment

Total = 25 marks

Attendance: 5 marks

75-79%: 1 marks

80-84%: 2 marks

85-89%: 3 marks

90-94%: 4 marks

+95%: 5 marks Tests: 2 x 5 marks = 10 marks

Individual Presentation (5 10 mins.): 10 marks

MPBIM - MBA, Entrepreneurship and NewVenture Creation, Ashish J Shah


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Module 1 Agenda

Introduction to International Business:

Definition

Trade and Investment Flow Theories of International Trade

Economic Theories

Forms of International Business

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International Business

History:

Greece, China: sent merchants to foreign lands

(BC)

1300 1500 AD: Black Death in Europe

1600s: conquests by colonial powers

1700s 1800s: age of mercantilism

1900s beginning of the golden era ofinternational trade

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Scope of International Business

www.peaceworks.com

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www.peaceworks.com

Daniel Lubetzky Social and commercial entrepreneur

not-only-for-profit enterprise

Profit with a Conscience: CAN BUSINESS BE "GOOD"?

Started with the aim of bringing peace between Arabsand Israelis

Theory of Economic Cooperation

Targets in-conflict parts of the world amongst others:Africa, Middle East

Range of cuisines and food segments catered to Ingredients sourced by multicultural teams from

various parts of the world

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www.peaceworks.com

Key impacts of PeaceWorks business model:

Commercial Cooperation across value network

Regional Participation Human Interaction

And this results in:

Job Creation and Export-led Growth

Employment & Technology

Peace Building

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International Business?

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Van Der Waals Forces!


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What is Business? An action (s) between/among a party (s) that results in an

exchange ofvalue.

What is International Business?

Transactions across international boundaries. activities designed to direct flow of a company's goods and

services to consumers or users in more than one nation for aprofit

(attempt a definition of your own)

Difference between domestic and international business? Not just in the concept, but also in the environment in which

business must be conducted.

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Overview of Global Business and

Economy

China (11 %), India (8.5 %), US (4.5 %) fastestgrowing economies

However, US trade deficit @ 6 % of GDP weak dollar good for US, bad for rest of world

Globalisation:

Hyundai i10, Suzuki - Alto, iPad, Windows

Two way channel for participating countries Reforms in India aimed at aligning Indian economy

with global ones

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Economy Indian firms investing more than US $ 10 billion each

year overseas

Global companies (IBM) moved upto 2 million BPOjobs alone to India

Globalisation: highlights threats to companies with local market orientation

creates jobs and opportunities where none

is an expensive and complex process

Internationalisation, Competitiveness (FDI in 2004 China ($

44.2 bn), India ($ 3.4 bn)) Indian govt. Aiming at creating 8 10 million jobs

each year and maintain 8 % growth

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Economy

World Economies (2004)

US: Attracted max. FDI and grew by 4.4 %

Has high trade deficit expected to cross 40 % of its economyand financed by Asian banks

Chinese economy expected to slow down as a result and thisimpact on world economy

Europe (2004) Grew by 2.1 % Investment growth negative and consumption flat

UK managed to avoid recession impact till 2005

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Economy Japan (2004)

2.6 % growth after a decade of stagnation. But, after thequake last week?

China (2004) 9.5 % growth Explosive growth in industry may lead to frequent boom-

and-bust cycles due to overcapacities in China

India (2004) 7 % growth

Fourth best buying power Many corporates now part of the $ billion club

Economic outlook marred due to geopolitical tensions withneighbours

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Internationalisation of Businesses JLR-TATA,

Arcelor-Mittal, Daimler-Chrysler, MTR-Orkla

Micro environment price, product, promotion,channels

Macro environment(domestic) - PESTLED

Macro environment incountry A PESTLED

Macro environment in

country B PESTLED

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Need for International Business

Characteristics of International Business

Importance of International Business

Approaches of International Business

Ethnocentric

Polycentric Regiocentric

Geocentric

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International Business Decisions The International Business Decision

Market Selection Decision

Entry and Operating Decision

Marketing Mix Decision

Marketing Organisation Decision

Internationalisation Process License

Export via Agent or Distributor

Export through own sales rep or sales subsidiary

Local packaging and assembly

FDI

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Driving Forces of International Business Economies of Scale

Meet Demands and Expectations of Markets

Culture

Leverage Experience

Technology Resource utilisation

Strategic vision

Competition and costs

Economic growth

Quality improvement

Economic integration and free markets

Living standards

Emergence of WTO

Role of MNC / MNE

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Restraining Forces of International Business Culture

Market competition in host country

Costs

National controls Nationalisation

War and Terrorism

Short-sightedness of management

Organisational history

Domestic forces Conflict with companies and within international organisation

Lack of home country support

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Aspects of the Domestic Environment: PESTLED (international) - generally uncontrollable factors

both at home and in target countries have +ve & -ve impact

+ve: US gives PNTR (Permanent Normal Trade Relations) status to

China (Boeing & Motorola) and lifts Apartheid sanctions on SA -ve: US sanctions on Iran, Iraq, Libya, South Africa impacts IBM,

Exxon

PESTLED (domestic)

US goods faced low exports because of a strong US Dollar in the80s. This changed in the 90s.

Rajiv Gandhi and Manmohan Singh brought in economic reformsand opening up of the Indian economy

Local competition Kodak hit by Fuji Film entry

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Aspects of the Foreign Environment Analyses involves PESTLED shocks

Dynamic changes complicate PESTLED issues further e.g. Chinasdynamic legal system and Coca Cola

Industrial practice gaps amongst developed, developing andunder-developed worlds to be factored e.g. understanding of theconcept of preventive maintenance of machines

Alien status of a business in the foreign country complicatesmatters e.g. Coca Cola in India asked to reveal formula or leave;returned to be troubled again by PESTLED factors

Political bias: tendency of domestic firms to receive favourabletreatment from local governments than alien firms

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Environmental Adaptation Needed

PESTLED (esp. culture) understanding and itsimpact a must for international business.

Cultural understanding and adjustment mostchallenging for international businesses

A modifiable frame of reference necessary as aculture platform to establish understanding and

proceed e.g. white colour has differentconnotations in India and the west, hand gestures

Cultural conditioning = iceberg (just 1/10th visible)

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Theories of International Trade

Theory of Mercantilism

Measures wealth of a nation by the size of its treasures

Aims at creating trade surplus to increase treasury andbuild a powerful army and infrastructure e.g. USA, UKengaged in many wars for the past century

Limitations:

Win-lose partnership where other trading partners are exploited

No contribution to global wealth

Restrictive trade policies ensure subsidised production and exportsbut limit imports to protect local industry. This creates highlyrestrictive trade practices around the world

Vast price disparity between purchase price of raw material andselling price of finished goods

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Theory of Absolute Advantage Adam Smith An Inquiry into the Nature and Causes

of the Wealth of Nations wealth is in per capita andquality of living and not in physical treasures alone

Absolute Advantage: ability of a nation to produce agood more efficiently and cost-effectively than anyother nation; therefore specialisation e.g. China.

Advantages could be: Natural: climate, geography e.g. India

Acquired Advantage: e.g. Industrial production capability->auto parts for Audi made in India, gem stone processing inJaipur, Surat, Navasari, Mumbai

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Theory ofComparative Advantage

Principles ofPolitical Economy and Taxation, DavidRicardo

A country benefits from international trade even if it isunable to produce more than one good moreefficiently than other countries by focusing on thegood(s) that it can most efficiently manufacture anddoing away with the goods it is less efficient at

manufacturing, thus gaining absolute advantage in themanufacture of one good rather than two or moregoods. E.g. Germany and solar tech

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Limitations:

Countries have otherpriorities and focus areas; hencefocus on achieving efficiency in one area of operationmay be difficult to achieve e.g. Gulf countries are oiltraders, but have focused extensively in becomingself-reliant in agriculture

Overall efficiency is better achieved whenmultipleproducts vis--vis a single product are manufactured

as resources are better utilised Assumption that labouris the only resource used in

production is invalid. Other resources are required too

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Division of gains is often unequal amongst tradingpartners leading to alienation of partners gettinglower returns

Theory stands good for more than two countriesparticipating and not alone for two countries asproposed in theory

Logistics costs are ignored in theory for

international trade Economic production quantities (EPQ) and

production pattern has not been discussed

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Factor Endowment Theory

Heckscher and Ohlin discussed type of products in

which countries can have an advantage, otherwise not

discussed by earlier theories e.g. bamboo, jute fromIndia, Bangladesh

Nations will export products that can be

manufactured using the abundant and cheap

resources possessed by it and will import thoseproducts otherwise requiring the use of its scarce and

expensive resources e.g. Kazakhstan and Uranium

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Factor Endowment Theory suggests three types ofrelationships: Land-Labour Relationship - country would specialise in

production of labour-intensive goods as labour is cheap relativeto the cost of land e.g. India

Labour-Capital Relationship where labour is expensive andcapital available, countries would specialise in the production ofcapital-intensive goods than labour-intensive goods e.g. ICs,defence equipment (EU)

Technological Complexities products produced using differenttechnologies have different cost competitiveness; optimum useof technology is made to mitigate higher production costs e.g.evolution of solar PV panels

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Summary:

countries with cheap labour will produce and

export labour-intensive goods while those with

access to capital but impacted by high labour

costs will produce and export capital-intensive

goods

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Theory of the International Product Life Cycle

Depends on the market size of the country

A large market e.g. USA, India, China ensures a largedomestic production base to achieve cost efficiency andenables international competitiveness through economiesofscale

Smaller countries outsource/offshore their requirementsand are competitive by economies ofscope through

expansion into international markets e.g. UK However, globalisation has rendered this theory less

tenable where products are globally launched andmanaged simultaneously e.g. USA and Germany

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Theory ofCompetitive Advantage

Porters The Competitive Advantage of Nations

Porters Diamond theory of competitive

advantage advocates the home-country as being

the source of competencies and innovations

Model helps understand the comparative position

of a nation amongst other competitive nations

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Porter argues that native factors and resources

not necessarily only/main source of competitive

advantage

Instead, proposes a cluster concept e.g. SiliconValley and that competitive advantage is a result

of a complex network of suppliers, manufacturers

and industries

competitive advantage is an outcome of four

interlinked factors

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Porters Diamond Firm Strategy, Structure and Rivalry: Competition in

the market pushes firms to improve productivity andremain innovative

Factor (Input) Conditions: key and non key factors skilled labour (specialised) and unskilled labour (nonkey). Key factors are not inherited, but created

Demand Conditions: demand in domestic market andshare of power between buyers and sellers i.e. sellers

or buyers market? Demand pressure from buyers willdetermine the extent to which a firm will/will not beinnovative to maintain demand levels

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Related and Supporting Industries: support base forproduction companies can improve the productivityand innovation of firms e.g. JIT for auto firms

Chance: factors beyond control of firms, industry andgovernments e.g. currency fluctuations, internationaltrade agreements

Government: policies, laws, assistance, catalyst tofirms. Will not only assist firms but will also challenge

their way of working to maintain competition in themarket. May introduce barriers or create new avenuesfor firms.

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Economic Theories

Monopolistic Advantage Theory

Stems from Stephen Hymers dissertation in the 60s

Showed FDI occurs more in oligopolistic industries

rather than those with near-perfect competition

Incoming companies into new markets therefore need

to overcome knowledge gaps of the target market

Advantages that MNCs must create are:

Superior tech

Superior marketing, management and finance knowledge

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Economic Theories

Product and Factor Market Imperfections

Caves (Harvard economist) expanded on Hymerswork

Showed superior knowledge permitted MNCs toproduce differentiated products that promptedconsumers to choose MNC products to localproducts, thus giving advantage to MNCs over

local firms Noticed that MNCs investing overseas were

generally engaged heavily in R & D and marketing

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Economic Theories

Financial Factors

Aliber imperfections in forex market may be

responsible for foreign investment

Companies with overvalued currencies attracted

to invest in countries with undervalued ones

Portfolio Theory: suggests that international

operations allow for a diversification of risk andhence tend to maximise expected ROI

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Economic Theories

International PLC

FDI is a natural stage in the life of a product

Company often forced to invest overseas in

production facilities to avoid losing competitive

advantage in those markets

This move is heightened during third and fourth

stages of the IPLC

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Economic Theories

Follow the Leader

Knickerbocker

When one firm, especially the leader in an

oligopolistic industry, enters a market, others

follow

This theory considered defensive and reactive as

firms feel insecure about losing market share tonew investor in their export markets

Also, a feeling of better safe than sorry

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Economic Theories

Internationalisation Theory

Extension of the market imperfection theory

A firm may have superior knowledge, but due to

inefficiencies in external markets, may extract ahigher price for the knowledge by utilising theknowledge itself in developing products instead ofselling the knowledge

Firms thus able to realise superior return oninvestment, particularly as this knowledge is alsoembedded in products made and sold by company

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Economic Theories

Dynamic Capabilities

Linked to RBV of a firm

Ownership of specific knowledge necessary, but not

enough for success in intl markets

Firm must be able to effectively create and exploit

dynamic capabilities for quality and/or quantity

deployment, which must be transferable to

international environments

Companies typically develop centres of excellence to

develop DCs to be applied to future investments

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Economic Theories

Dunnings Eclectic Theory of International

Production (OLI model)

Attempts to explain why firms prefer FDI to other

modes of entry such as exports, licensing, JVs,

strategic alliances

A firm investing overseas must have 3 advantages:

Ownership-specific advantages Location-specific advantages

Internationalisation

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Economic Theories

Observation from theories:

Major FDI made by large, research-intensive firms

in oligopolistic industries

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Forms of International Business

Exports

Channel partners exim partners, agents,

marketers, stockists, distributors

Outsourcing

Offshoring

JVs, strategic alliances, hostile takeovers, buy-out

FDI

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m 1 - international business - introduction

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