Sitkin and Bowen International Business Chapter 1: Introduction Section I. The international context - Terminology and useful concepts - Key statistics The International Business framework - Strategic drivers - Challenges and choices © Oxford University Press, 2013. All rights reserved. Globalization • Because of globalization, for the first time in history, the availability of international products and services can be accessed by individuals in many countries, from diverse economic backgrounds. Sitkin & Bowen: International Business, 2nd edition 4-2 What is International Business? International business consists of transactions that are devised and carried out across national borders to satisfy the objectives of individuals, companies, and organizations. Sitkin & Bowen: International Business, 2nd edition 4-3 Difference between International Business and Globalization • International business is just the actual process of conducting business between agencies in different countries. • Globalization is the process that leads to declining costs of conducting international business. • So, International business is conducting it, & globalization is about lower transaction costs. Sitkin & Bowen: International Business, 2nd edition 4-4 • More and more firms around the world are going global, including: – Manufacturing firms eg. 3M – Service companies (i.e. banks, insurance, consulting firms) eg. Barclays bank – Art, film, and music companies eg. 20th Century Fox. Sitkin & Bowen: International Business, 2nd edition 4-5 Basic principles • ‘Globalization’ and ‘international business’ (IB) are based on two different paradigms (worldviews): - Seeing world as a whole (stressing similarities), vs. - Focusing on differences between home and host countries (stressing differences) • IB acknowledges difficulties of operating cross-border: - ‘Psychic distance’ between home and host country - ‘Insiderization’ strategies to overcome ‘home bias’ - There is no one right way of doing IB Sitkin & Bowen: International Business, 2nd edition Companies doing international business • Corporate actors - Multinational enterprises (MNEs) - Can include small and medium sized enterprises (SMEs) • Non-corporate actors - Governments and intergovernmental organizations - Other stakeholders IB focuses on both categories and is therefore broader than International Management, which highlights the former Sitkin & Bowen: International Business, 2nd edition International Business Terminology • • • • • International business Foreign business Multidomestic company (MDC) Global company (GC) International company (IC) Sitkin & Bowen: International Business, 2nd edition 1-8 International Business Terminology, cont’d. • International Business – A business whose activities are carried out across national boarders • Foreign Business – The operations of a company outside its home or domestic market • Multidomestic Company – An organization with multicountry affiliates • Each formulates its own business strategy on perceived market differences Sitkin & Bowen: International Business, 2nd edition 1-9 International Business Terminology, cont’d. • Global Company – an organization that attempts to standardize and integrate operations worldwide in most of all functional areas • International Company – A global or multidomestic company Sitkin & Bowen: International Business, 2nd edition 1-10 MNE configurations • Head office vs. international subsidiaries: centre/boarders • Firms trade into host country and/or create a physical presence there = Foreign Direct Investment (FDI) • Different MNE units often fulfil different functions, depending on where they operate along value chain: - Upstream (production) side - Downstream (marketing side) Sitkin & Bowen: International Business, 2nd edition Competing in Global Markets • Exports—domestically produced goods and services sold in other countries. • Imports—foreign goods and services purchased by domestic customers. Sitkin & Bowen: International Business, 2nd edition 4-12 Measuring Trade Between Nations • Balance of trade—difference between a nation’s exports and imports. – Trade surplus when a country exports more than it imports and achieves a positive balance of trade – Trade deficit when a country imports more than it exports and achieves a negative balance of trade Sitkin & Bowen: International Business, 2nd edition 4-13 Why Nations Trade • International trade is vital because: – It expands markets for products – Allows companies to seek out growth opportunities in other nations – Makes production and distribution systems more efficient – Reduces firms’ dependence on the economies of their home nations Eg. Carrefour, Wal-Mart, Tesco Sitkin & Bowen: International Business, 2nd edition 4-14 Internal drivers of IB activity • Expanding sales - Leverage existing competencies - Activities that are international by their very nature(commodities) - Achieve critical mass • Spreading risk - Country risk - Product life cycle risk - Foreign exchange risk • Acquiring inputs - Physical resources - Human capital Sitkin & Bowen: International Business, 2nd edition External drivers of IB activity • Technology • Regulatory framework - Legalities - Barriers to entry • Global competition • International finance Sitkin & Bowen: International Business, 2nd edition Globalization Forces • Political forces – Reduction of barriers to trade and foreign investment by governments – Privatization of former communist nations • Technological forces – Advances in computers and communications technology – Internet and network computing Sitkin & Bowen: International Business, 2nd edition 1-17 Globalization Forces, cont’d. • Market forces – Globalizing companies become global customers • Cost forces – Goal for economies of scale to reduce unit costs • Competitive forces – Increase in intensity due to explosive growth in international business Sitkin & Bowen: International Business, 2nd edition 1-18 Why is International business Different from Domestic Business? • Environment: all the forces surrounding and influencing the life & development of the firm. • External/ Uncontrollable forces- No direct control of management. – Competitive, distributive, Economic (Unit labor cost, GNP, personal consumption expenditure) – Socioeconomic, financial, legal, physical, political, sociocultural, labor, technological Sitkin & Bowen: International Business, 2nd edition 4-19 Why is International business Different from Domestic Business? • Internal/ Controllable forces- control of management. – For eg. Some European concerns & foreign subsidiaries in EU have relocated parts of their operations to other nations in the Union to exploit the lower wages there. Sitkin & Bowen: International Business, 2nd edition 4-20 Why is International business Different from Domestic Business? • Domestic Environment: All the controllable forces originating in the home country. • Foreign Environment: All the uncontrollable forces originating outside the home country that surround and influence the firm. • International Environment: Interaction between domestic & foreign environmental forces Sitkin & Bowen: International Business, 2nd edition 4-21 Environments of International Business • Environment – All the forces influencing the life and development of the firm • Forces – External Forces (Uncontrollable) – Forces over which management has no direct control – Internal Forces (Controllable) – Forces that management can use to adapt to external forces Sitkin & Bowen: International Business, 2nd edition 1-22 External Forces • Competitive – Kind, number, location • Distributive – For distributing goods and services • Economic – GNP, unit labor cost, personal consumption expenditure • Socioeconomic – Characteristics of human population • Financial – Interest rates, inflation rates, taxation Sitkin & Bowen: International Business, 2nd edition 1-23 External Forces, cont’d. • Legal – Laws governing how international firms must operate • Physical – Topography, climate, and natural resources • Political – Forms of government, and international organizations • Sociocultural – Attitudes, beliefs, and opinions • Labor – Skills, attitudes of labor • Technological – Equipment and skills that affect how resources are converted to products Sitkin & Bowen: International Business, 2nd edition 1-24 Internal Environmental Forces • Factors of Production – Capital, raw materials, and people • Activities of the organization – Personnel, finance, production, and marketing Sitkin & Bowen: International Business, 2nd edition 1-25 Why Is International Business Different? • Domestic Environment – All the uncontrollable forces in the home country that surround and influence the firm’s life and development • Foreign Environment – All the uncontrollable forces originating outside the home country that surround and influence the firm • different values • difficult to assess • interrelated Sitkin & Bowen: International Business, 2nd edition 1-26 Why Is International Business Different? cont’d. • International Environment – Interaction between domestic and foreign environmental forces or between sets of foreign environmental forces – Increased complexity for decision-making • Decision making more complex Sitkin & Bowen: International Business, 2nd edition 1-27 Going Global • While expanding into overseas markets can increase profits and marketing opportunities, it also introduces new complexities to operations. • Key decisions before expanding overseas include – Determining which foreign markets to enter – Analyzing the expenditures required – Deciding on the best way to organize overseas operations Sitkin & Bowen: International Business, 2nd edition 4-28 Types of International Business Sitkin & Bowen: International Business, 2nd edition Going Global • Levels of Involvement in International Business Sitkin & Bowen: International Business, 2nd edition Explosive Growth • Foreign Direct Investment and Exporting – FDI - Direct investment in equipment, structures, and organizations in a foreign country • level sufficient to obtain significant management control (Table 1.2) – Exporting – transportation of any domestic good/service to a destination outside a country or region Sitkin & Bowen: International Business, 2nd edition 1-31 Ethical issues for MNCs – Corruption — illegal practices that further one’s business interests. – Sweatshops — employing workers at low wages for long hours and in poor working conditions. – Child labor — full-time employment of children for work otherwise done by adults. – Sustainable development — meeting current needs without compromising future needs. – Xenophobia (in the sense of fear of foreignness) Sitkin & Bowen: International Business, 2nd edition 4-32 International Business Model Sitkin & Bowen: International Business, 2nd edition 1-33