International Business Environments
China Focus
Political, Economic and Technology Focus
Dr. Thomas Lairson
Global Business Revolution
Summary
o The GBR defines much of the international environment for business
o Major structural changes in the global economy
o Knowledge as primary source of value and competitiveness
o Technologies of ICT and logistics alter relative prices and propel changes
in global flows and in global business organization
o Lean and flexible manufacturing merge with innovation-driven firms to
accelerate the speed of business
o Global production networks as major organizational innovation derive
from the combination of Toyota and Silicon Valley
o GBR creates opportunities for poor nations to capture knowledge and enter global
economy
o GPNs provide avenues for upgrading by poor nations to achieve sustainable
growth
I. The environment of business everywhere is greatly affected by the GBR
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Dramatic and far-reaching changes in the organization, scale, scope, production
processes, and products of business
Transformation of macro business environments 1970-2008
o New structural characteristics: knowledge/technology; globalization;
emerging economies; new organizational forms in business
o Global dynamics affecting shifting comparative advantage
II. Major structural changes
A. Knowledge/technology have become the most important source of value in
products, production, supply chains, and business organization
o “Over the entire past three centuries, the main source of wealth in market
economies has shifted from natural assets (notably land and relatively
unskilled labor) to tangible created assets (notably buildings, machinery
and equipment, and finance) to intangible created assets (notably
knowledge and information).” John Dunning
o One estimate is that in the 1950s, 80% of U.S. value added in
manufacturing was in primary or processed foodstuffs, materials, or
mineral products and 20% knowledge. In 1995, these ratios had changed
to 30% and 70%.
o Another estimate suggests the intellectual capital of firms is five to sixteen
times as valuable as the physical capital of these same firms.
o From 1975 to 1995, R&D expenditures rose at 3 times the rate of growth
of manufacturing output in OCED countries.
o “three-quarters of the value of publicly traded companies comes from
intangible assets (based on knowledge), up from around 40% in the early
1980s.”
Source: Economist, October 11, 2007
B. Technological changes began to alter dramatically the costs of three key elements
of economic exchange after about 1960: communications, information, and the
movement of people and goods. The changes led to new capabilities, to new
products and processes and to the acceleration in the role of knowledge. In many
ways, the current era of globalization is a result of these technological and related
economic changes.
This is promoted by major technological changes:
Large and rapid declines in cost of creating, manipulating and
distributing (on a global scale) information
Moore’s Law
Figure II
Cost Comparisons for Information Production and Distribution
1970
1999
$7601
$0.17
$5257
$0.17
Cost of 1Mhz of processing power
Cost of 1 megabit of storage
$150,000 $0.12
Cost of sending 1 trillion bits of information
Source: Pam Woodall, “Untangling E-conomics,” The Economist, September 21, 2000.
Large and rapid declines in communication costs on a global scale: 35%
decline per year for more than 40 years
Large and rapid declines in cost of/increasing speed in delivery of products on
a global scale – containerization
i. Containerization prices for goods moving from Asia to the US
dropped by 65% between 1972 and 1997. Kenney, 2004, 6.
One measure of this last point is change in the cost of logistics and in the cost
of inventory investment.
Logistics and Inventory Costs in US
1980
1995
Inventory cost
% of GDP
9%
4.3%
Logistics cost
% of GDP
17.2%
10.8%
Source: Martin Kenney, “Introduction,” in Martin Kenney and Richard Florida,
(eds.) Locating Global Advantage, Stanford: Stanford University Press, 2004, 5.
o Technological changes lead to large and rapid increases in global economic
transactions and cumulating variety of new global products
Trade
Financial transactions
FDI
Knowledge
Global Production Networks
Emerging Technologies
Web 2.0
Nanotechnology
Biotechnology
o Globalization intersects with rapid increases in national institutional
capabilities in some poor nations = emerging economies
o 19th Century Globalization did not lead to growth in poor states
o Late 20th Century Globalization:
Open global markets and global flows of knowledge, technology
and investment intersect with new capabilities of governments and
firms in poor nations
Japan post 1955
Asian Tigers
China
Brazil
Russia
India
o Emerging economies create new markets, new production capabilities,
new sources of global and local innovation, new sources of
competition
o Deep integration of economies across manufacturing, trade, product
development, distribution, knowledge networks, investment,
technology diffusion
o Governments from advanced and emerging economies become central
and essential players in globalization and growth
C. Emergence of New Forms of Production and Organization
Effects of Technological Changes
o Increasing speed of new product and process
development/shorter product cycles
o Strategic alliances – knowledge sharing; risk sharing
o Knowledge capture and application to innovation as main
basis for competitive advantage
New forms of TNCs
o Ability to manage a global portfolio of complementary
assets inside and outside of the firm
o Firms and states as partners in creating complementary
assets
o Lean flexible manufacturing based on integrating global
complementary assets
o Global Production Networks - Intra-firm trade
Intensifying global competition focused on innovation
o Deeper global division of labor – finer specialization
o Network forms of organization
o Mobility of intangible assets – knowledge, technology,
organizational skills, investment capital
Global Production Networks (GPNs)
What is a GPN?
o A new institutional form in the global economy – a
coordinated system of capabilities and products used to
generate competitive advantages in global markets.
o A new form for production and distribution that involves
the fragmentation – through both horizontal and vertical
disintegration – of the value chain into various elements or
nodes of value-added capabilities. The geographic
dispersal of production and the integration via ICTs
Basic features of GPNs:
o Fragmentation of value chain
o Increased outsourcing of manufacturing and
services
o Computer-based interaction for production,
logistics, design
o Increased production speed
o Expanding geographic of production and enhanced
global integration
o Creation of global supply base
o Production processes that previously were feasible
and cost effective only within a single firm (and in a
single physical location) or within a nation and a
small number of firms can now be reorganized into
a wide array of specialized firms located across the
globe in the most advantageous locations and with
little regard for distance per se.
o The GPN has a distinct structure of power and
control, typically starting from one or more lead
MNCs – or global system integrators (GSIs). These
firms usually have the greatest knowledge and other
resources – marketing, design, management,
information, branding, market access – and whose
core competency is to organize these resources to
structure and integrate the value chain.
o GPNs are the most prominent in firms with
significant levels of knowledge intensity in
production and/or product and where firms enjoy
considerable economies of scale.
o Composed of linkages among TNCs, national and
local governments, local firms, research institutes,
parastatal institutions, global research labs,
universities (science, technology, and business
units), consulting firms, government agencies,
NGOs, and IOs. These linkages are composed of
the exchange of products, strategic alliances, and
exchanges of knowledge and technology.
o The network is bound together by the actions of the
GSI in relation to geographically dispersed firms
and the states where they are located. This is
accomplished through the creation of an
information and logistics system to bind the
network together, through foreign direct investment
by the GSI (examples include Cisco Systems and/or
contract manufacturers), through the sharing of
knowledge and technology, and through support for
the creation of institutional capabilities in the
various states where nodes of production are
located. The various nodes in the network are not
all equal because differentiated connections to
global markets and global knowledge networks
exist across the network.
The development of GPNs:
GPNs a re a combination of lean production (Toyota) and the
Silicon Valley networked firm model enhanced by advanced
business technologies
Gold Standard for Global Best Practice
Toyota Production System
Lean/Flexible/JIT manufacturing
Quality control
Knowledge-based innovation on shop floor
Enhance and integrate knowledge across the organization
Quality circles
Application of information technology to permit the
substitution of information for physical inventory and
logistics
New global standards for cost, quality and speed of
production, ramp up time to market
Build on the close relationships with its suppliers to
“outsource” larger and larger parts of the automobile value
chain
Production based on actual demand not on forecasts
System of knowledge-based organizational capabilities
Mass customization – various market niches
Batch production
Silicon Valley Model
Formed in the 1960s and 1970s
Related to but different from Toyota
Hewlett Packard/ Fairchild Semiconductor/ Intel
Entrepreneurial risk-taking culture
Venture capital culture – trial and error
Knowledge-sharing culture based on belief in technology
Academic culture of openness and give and take
Informal information networks
Many SMEs of specialist suppliers and service providers
Differentiated firms – specialization; fragmented supply
chains
Premium on innovation; early versions of open innovation
Networks of firms, suppliers, services, universities,
research labs, VC, business associations
Cooperation in JVs and strategic alliances
Flat organizations
Core competency/outsourcing
Network systems spreads risks and costs; draws on
differentiated and distributed knowledge/innovation
capabilities
Application of information technology to permit the
substitution of information for physical inventory, logistics,
collocation of teams (CAD, CAM, SCM, ERP, EDI)
Emergence of the systems integrator firm (lead firm;
flagship firm)
Development of Lean and Flexible Organizations
Walmart – Lean plus SV
Dell
Cisco
Impact of Global/Regional Production Networks
Rapid economic growth in selected nations
Creation of a global supply base
Globalization of innovation – process
New knowledge centers – globally dispersed
Regional production and knowledge specialization systems drive
regional dynamics of flying geese
Knowledge networks expand and deepen over larger geographic
space through exchange of increasingly richer information and data
Component modularity and process modularity
Mechanism for local and national upgrading across value chain
Global Dynamics of change
Over time, which nations industrialize and which do not?
Political Economy shapes the direction and timing of shifting capabilities
for industrialization from one country to another
Basic dynamic is industrialization starts in lower cost states but the
process of economic growth leads to rising costs as incomes
increase with success
Industrialization starts in labor-intensive industries drawing
workers from agriculture. Eventually, these workers are employed
and the labor surplus turns into a labor shortage. Labor costs rise
and firms react by adopting more capital-intensive production.
This raises labor costs more as workers become more skilled.
A second reaction in an age of globalization is to shift laborintensive parts of the value chain to other nations with lower labor
costs and sufficient hard and soft infrastructure.
Advanced dynamic is need for technology savvy, adaptive,
upgrade capable, innovation-based capabilities in emerging
economies with lower costs
Dynamic is driven by TNCs looking for best locations for FDI
Track 1: Low cost labor combined with governmental
effectiveness in creating infrastructure, maintaining
commitment to liberalization, improve capabilities for
upgrading through time (labor intensive, mature industries,
slow tech change)
Track 2: Drawn to local clusters with combination of labor
costs and cluster specializations in innovation (knowledge
worker intensive, higher tech, rapid tech change, flexible
manufacturing)
Locations that attract FDI and the knowledge and technology and
global market access are those nations able to assemble the low
wages with complementary assets in infrastructure and national
policy
Sustained success involves achieving global market share in
products, upgrading to achieve global quality
Sustained success also involves the capacity for upgrading of
capabilities and moving up the value chain.
Sustained success leads to rising costs: TNCs and national firms
look for new lower cost locations with the right combination of
low wages and complementary assets
Examples:
US/Western Europe
Japan
to
Japan/US
to
Japan 1890-1920
Korea and Taiwan 1915-1945
to
Asian Tigers 1965-1997
HK, Taiwan
to
China 1980-2008
Korea, Japan
to
Vietnam 1995-2008
China
Vietnam 2005 - ?
to