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Lecture 1 Intro Business

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Lecture 1 IB: Introduction
4 th October 2017
Lecture 1: An introduction to the concept of International Business
Business organisation in a global environment: a course summary
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External Environment: institutions, culture, legislation
MNE: Multifunctional Enterprises
Corporate strategies: Growth, Stability, Renewal
What is International Business?
International Business: is a business that engages in international (cross-border)
economic activities and/or the action of doing business abroad.
 The European Union was created to promote trade & investment. There´s lots
of international business because of that.
Lecture 1 IB: Introduction
4 th October 2017
Variety of international business activities
•International trade:1
- Intra- vs inter-firm trade.
o Firm Trade: company that sells/ imports goods.
 Inter: between different companies.
 Intra: covers all trade that happens within the same frim.
“Toyota imports components from Mexico”. It happens in the
same company but it is still registered in the Balance of
Payment.
o Some Retailers Subcontract: they work with other companies but they
don’t own them.
- Intra- vs inter-industry trade.
o Most of the trade that happens at a global level.
•International investment & related income.2
- Portfolio investment: investment in stocks and bonds3 that do not entail4 the
active management of foreign assets. (buy 8%, until 10%)
- Foreign Direct Investment (FDI): active participation (more than 10%), you do
have a say on how the company is run.
Both Portfolio Investment and FDI are registered in the Balance of Payment -> which is
an accounting exercise that registers the imports and exports.
•Collaborative agreements b/n firms & institutions of different countries
- Licensing
- Franchising
- Subcontracting etc.
Entry into foreign markets: The internationalization process
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Equity entry modes: FDI -> implies greater commitment & greater knowledge.
FDI: Foreign Direct Investment: when company A owns more than 10% of
company B.
Non-equity entry modes: License, Export via agent or distributor and Export
directly: implies less commitment.
If you own the Company: INTRA
It is important for the economists
3 acciones y bonos
4 implicar
2
Lecture 1 IB: Introduction
4 th October 2017
Going International: non-equity internationalization
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Non-equity International Business -> Import & Export: lets you take advantage
of economies of scales, and indirect export is done through intermediaries:
Intermediaries
- Direct exports represent the most basic mode, capitalizing on economies of
scale in production concentrated in the home country and affording better
control over distribution.
- Indirect exports is exporting through an intermediary.
- Intermediaries are more common for standardized products and commodities
(e.g. textiles, woods)
o Local sales agents receive a commission on sales
o Distributors trade on their own account. They buy the products and
then sell them on in the local market at their own risk and using their
own channels.
Lecture 1 IB: Introduction
4 th October 2017
International Contracts5
•Contract Licensing: Firm A’s agreement to give Firm B the rights to use A’s proprietary
technology (e.g. patent) or trademark for a royalty fee paid to A by B.
- Licensor is the company granting a license.
- Licensee is the company receiving a license.
Example: Microsoft-Windows // Ferrari-> licenses brand logo to produce T-shirts //
Disney gives the T-shirt company the approval to produce them with Mickey, and the
company pays royalties back.
•Franchising represents a similar idea, but typically covers entire business concepts:
not only the product, service and trademark, but also the marketing strategy,
operation manuals and quality control procedures.
- Franchisor is the company granting a franchise.
- Franchisee is the company receiving a franchise.
Examples: McDonalds (Cosmen)-> McDonalds doesn’t run the company, Cosmen does,
through some guidelines. // Sturbucks // Body Shop-> one of the 1st companies to be
successful.
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The licensor/franchisor does not have tight control over production and
marketing, and thus how their technology and brand names are used.
The International contracts provide quick growth without taking too much
responsibility. The risk is put on the franchisee, since the people abroad are the
ones who have to put the capital. As a franchisor you don’t have that much
control. *There is always law regulation.
Forms of Co-operation
- Turnkey project: A project in which clients pay contractors to design and
construct new facilities and train personnel (e.g. Alstom – power stations).
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Design and build (DB) contract: A contract combining the architectural or
design work with the actual construction.
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Build–operate–transfer (BOT): A contract combining the construction and
temporary operation of a project eventually to be transferred to a new owner.
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Consortium: A project based temporary business owned and managed jointly
by several firms.
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Subcontracting: A contract that involves outsourcing of an intermediate stage
of a value chain.
Companies may engage in different kind of contracts at the same time.
Lecture 1 IB: Introduction
4 th October 2017
Foreign Direct Investment (equity-based internationalisation)
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Multinational firms (MNEs) are enterprises comprising parent enterprises and
their foreign affiliates.
o A parent enterprise is defined as an enterprise that controls assets of
other entities in countries other than its home country, usually by owing
a certain equity capital stake
 10% or more is the threshold for the control of assets
o Foreign affiliate:6
 a subsidiary – a parent company owns more than a half of the
shareholder’s voting power. It is the majority share holder, they
have greater saying of the company.
 an associate – share > 10% and < 50 %. For the minority share
holder, often the regulation of the country you operate in might
nor be clear for you.
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Distinguishing characteristics:
o involvement in FDI
o ownership & control of assets abroad
Do FDI include Joint-Ventures? FDI imply Joint-Ventures7 too, they allow to share the
risk between my company and other company.
Some other useful terms related to FDI
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FDI flow: The amount of FDI moving in a given period (usually a year) in a
certain direction. It is more volatile than FDI stock and highly correlated with
the business cycle.
FDI stock: The total accumulation of inbound FDI in a country or outbound FDI
from a country across a given period of time (usually several years.
o The Value Chain: all the steps that are required for the delivery of a
product or service.
The distinction between subsidiary and associate is important.
Joint-Ventures are a type of FDI
Lecture 1 IB: Introduction
4 th October 2017
Types of MNEs
- Horizontally integrated
- Vertically integrated
- Production networks
Horizontally-integrated MNEs:
- Horizontal FDI duplicates its home country-based activities at the same value
chain stage in a host country through FDI
Vertically-integrated FDI
- If a firm through FDI moves upstream or downstream in different value chain
stages in a host country, we label this vertical FDI. It is common in car
manufacture industry, it can be upstream or downstream.
Example: Production networks: ‘American’ car: the value structure
 Korea: 30% for assembly
 Japan: 17.5 % for components and advanced technology
 Germany: 7.5 % for design
 Taiwan & Singapore: 4% for minor parts
 UK: 2.5 % for advertising & marketing services
 Ireland & Barbados: 1.5 % for data processing
 US: only 37% of the production value is generated
Lecture 1 IB: Introduction
4 th October 2017
A Unified Framework for studying International Business
Our ‘big question’ is:
“What determines the success and failure of firms around the globe?”
To answer this question, we focus on two core perspectives:
1. an institution-based view
2. a resource based view.
Institutional Perspective
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Doing business around the globe requires intimate knowledge about the formal
and informal rules of doing business in various countries.
o Some formal rules, such as the requirements to treat domestic and
foreign firms as equals, enhance the potential odds for foreign firms’
success.
o informal rules such as culture, norms and values play an equally
important part in shaping the success and failure of firms around the
globe.
An institution-based view suggests that the formal and informal rules of the
game, known as institutions, shed light on what is behind firms’ performance
around the globe.
Resource-based View
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An Institution based view which views performance as determined only by
external environments has its limitations.
The resource-based view focuses on a firm’s internal resources and capabilities.
the “liability of outsidership” infers the more a firm’s origins differ from the
host environment, the less the firm has experience in the host country
The primary weapon of foreign firms is overwhelming resources and
capabilities that, after offsetting the liability of outsidership, still result in some
significant competitive advantage.
o Example: firms as Coca Cola and Microsoft possess firm-specific
resources that enabled them to attain leadership positions around the
globe.
Lecture 1 IB: Introduction
4 th October 2017
Liability of Outsidership8
There are 3 main things that increase the risk and, therefore, impact on the liability of
Outsidership: Distant Origins, Lack of local Experience and Lack of nearby experience.
Resources to Support Internationalisation
Traditional Internationalisation process:
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Experiential knowledge is knowledge learned by engaging in the activity and
context.
o Uppsala (stage) model (Johansen & Vahllne): is a model of
internationalization processes focusing on learning processes and
incremental decisions. He claims that as an outsider there is more risk.
To overcome the obstacle of being an outsider the best part is being an
outsider.
o Sweden’s IKEA, took 20 years (1943–1963) before entering Norway.
Then it focused on building Western European operations. Only more
recently has it accelerated its internationalization.
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Network building and exploitation
Over time, firms in a network reinforce each others’ internationalization
processes, thus the expertise in a firm’s network grows both with new
members joining, and with existing members gaining more experience.
what we are going to be looking at next. Institutional perspective: doing business
internationally requires knowledge of the institutions -> not only law, but also
culture…
There are two perspectives: the institution-based-view, and the resource-based-view.
Lecture 1 IB: Introduction
4 th October 2017
Accelerating Internationalization Process
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Born global (international new venture)
o Start-up company that from inception, seek to derive significant
competitive advantages from the use of resources and the sale of
outputs in multiple countries (e.g. Logitech)
Factors accelerating internationalisation
o Building an entrepreneurial team with international experience
o Learning from importing and inward foreign investors
o Learning from other operating firms in the foreign country
o Acquiring resources in the foreign country possibly entire firms
(Mergers & Acquisitions)
What determines the expansion of international business processes?
What is Globalization?
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Globalization as a driver of international business expansion
Within political economy G. is identified with a process of intensifying
worldwide economic integration across different dimensions:
 Trade
 Production
 Finance
 Migration.
Globalization in historical perspective
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1st wave of globalization (1880 –1929):
o Industrialisation of the North, while South remained agrarian; widened
world inequality
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2nd wave of globalization (1950 - present): beginning of new global economy:
o economies of scale, mass production, assembly lines;
o surge from 1970s driven by neo-liberal ideology;
o deindustrialisation of the North vs industrialisation of the South;
o international specialisation – fragmentation of production processes
and their geographical relocation
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3rd wave of globalization (1980 - present)
Drivers of globalization
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Market drivers
Cost drivers
Government drivers
Competitive drivers
Lecture 1 IB: Introduction
4 th October 2017
In sum…
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There are two core perspectives that provide a framework for studying this
field, including:
1. the institution-based view
2. the resource-based view
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Globalization is a multidimensional process which is evident across the cultural,
political and economic domains
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Globalization should be located within its historical context.
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Globalization has its pros and cons.
Key Reading:
Peng and Meyer (2011), Chapter 1 & 11.
Supplementary Readings:
Hill, C. (2012), Chs 1, 6-9.
Peng and Meyer (2011), Chapters 8-9
Rugman, A. M. & S. Collinson (2012), Chapters 1-3
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