Chapter 1 International business - firms' performance of trade and investment activities across national borders Globalization of markets - ongoing economic integration and growing interdependency of countries world wide Internationalization - tendency of companies to deepen their international business activities systematically International trade - exchange of products and services across national borders - exporting or importing (global sourcing) International portfolio investment - passive ownership of foreign securities, such as stocks and bonds to generate financial return - usually short-term, and no active management or control over the assets Foreign direct investment - a firm establishes a physical presence abroad through acquisition of productive assets such as capital, labor, land, plant, and equipment - firm establishes a new legal business entity in the host country, subject to regulations of host government - usually long term, with active management Why trade growth has long outpaced GDP growth? 1. rise of emerging markets that are home to the growing middle class 2. advanced economies are now sourcing many of the products they consume from low cost manufacturing locations 3. advances in information and transportation tech, decline of trade barriers, liberalization of markets - entrepôt economies such as HongKong, Singapore imports a large volume f products, some of which they process into higher value added products and some to re-export 4 risks in internationalization 1. Cross cultural risk - situation in which a cultural misunderstanding puts some human value at stake - arises from differences in language, lifestyles, mindsets, customs, religions - all result in different negotiation patterns, decision making styples, ethical practices 2. Country risk - potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in foreign country - such as foreign government intervention, laws and regulations, 3. Currency risk - afverse fluctuations in exchange rates 4. Commercial risk - firms' potential loss or failure from poorly developed business strategies or procedures - poor business partners, poor choices in pricing, timing of market entry, promotion Who participates in international business 1. Focal firm - initiator of an international business transaction - conceives, designs, produces offerings intended for consumption - primarily large multinational enterprises and small - medium sized enterprises 2. Distribution channel intermediary - specialist firm that provides various logistics and marketing services for focal firms - such as independent distributors and sales representatives located in foreign markets 3. Facilitator - a firm or individual with special expertise in banking, legal advice, customs clearance, that helps focal firms perform international business transactions - include logistics service providers, freight forwarders (specialized logistics service provider that arranges international shipping on behalf of exporting firms), banks 4. Governments - acts as supplier, buyer, regulator Customers of international business - individual consumers and households - retailers: businesses that purchase finished goods for resale - organizational buyers: businesses, institutions, governments Born global firm - young entrepreneurial company that initiates international business activity early in its evolution, moving rapidly into foreign markets Why do firms internationalize? 1. Seek opportunities for growth through market diversification - ex: ATMS 2. Earn higher margins and profits - market growth in mature economies tend to be flat due to intense competition, foreign markets may be underserved with less competition 3. Gain new ideas - unique foreign enviroments expose firms to new ideas for products, processes, and business methods 4. Serve key customers better 5. Be closer to supply sources - benefit from global sourcing advantages - gain more flexibility in product sourcing 6. Access to lower cost or better value factors of production - enables firm to access capital, tech, talent, and labor at lower cost 7. Economies of scale - reduce per unit cost manufacturing by operating at high volume - by expanding internationally, firm increases size of customer base, which increases volume of production Chapter 2 Phases of globalization Drivers of Globalizatin - worldwide reduction in barriers to trade and investment, such as NAFTA - market liberalization and adoption of free markets - industrialization, economic development, and modernization - integration of world financial markets, make international transaction easy - advances in tech Tech advances and globalization Information technology - science and process of creating and using information resources - allow connection of mother firm with subsidiaries with instant sharing of date - search engines provide easy access to reaserching markets, competitors...etc Communications - taobao allows business over the internet for even small firms and individuals - internet of things: machine to machine connectivity online, mobile phone and app development have grown enormously - social media facilitate the free flow of information Manufacturing - computer aided design of products, robotics reduce production cost Transportation - development of fuel efficient jumbo jets, giant ocean freighters and new transportation tech reduced shipping times and costs Dimensions of market globalization 1. Intergration and interdependence of national economies - government create supernational institutions such as World Trade org to facilitate globalization 2. Rise of regional economic integration blocs - consist of groups of countries that facilitate reduced trade and investment barriers such as NAFTA, European Union 3. Convergence of consumer lifestyles and preferences 4. Globalization and production - global competition drives firms to reduce production costs, create economies of scale - many firms relocate to low labor cost locations for production 5. Globalization of services - banking, hospitality, retailing interconnected in world market Societal consequences of globalization 1. Contagion - tendency of a financial or monetary crisis in one country to spread rapidly to other countries due to ongoing intergration - ex: 2008 financial crisis had impacted many other countries, reduced consumer confidence, lead to less spending 2. Loss of national sovereignty - sovereignty: ability of a nation to govern its own affairs - MNE activites can interfere with a government's ability to control its own economy, social structure, and political system - large multinational firms can apply a lot of pressure on governments through lobbying or campaign contributions 3. Offshoring - relocation of manufacturing and other value chain activities to cost effective locations abroad - create new jobs but also cost many people their jobs 4. Reshoring - return of manufacturing and services back to home country 5. Effect on the poor - some MNEs have been criticized for paying low wages, exploiting workers, use child labor Globalization effect on environment - increase pollution and damage on habitat - government taken steps to place environmental policies - firms try to protect environment with new practices Chapter 3 Culture - values, beliefs, customs, arts and other products of human thought and work that characterize the people in a given society What culture is not - not right or wrong - not about individual behaviour: is about groups, collective phenomenon of shared values and meanings - not inherited: comes from social environment Socialization and acculturation - socialization: process of learning the rules and behavioural patterns appropriate to one's society - acculturation: process of adjusting and adapting to a culture other than one's own Dimensions of culture 1. Values and attitudes - values: represent a person's judgement on what is good or bad, normal or abnormal, important or unimportant - values are basis for motivation and behaviour, guide the development of attitudes and preferences - attitudes: similar to opinions but often are unconsciously held, and may not be based on logical facts 2. Manners and customs - ways of behaving and conducting oneself in public - such as greetings with kisses, handshakes, hugs Perception of time - monochronic orientation to time: rigid orientation in which individual is focused on schedules, punctuality, and time as a resource, in Canada, Australia, US - polychronic perspective on time: a flexible, non linear orientation, in which individual takes a longterm perspective and emphasizes human relationships, in China, Japan Perception of space - each culture differ in comfort with different levels of physical and personal space Symbolic productions - business use symbols in form of trademarks, logos, and brands, they help to unite people Material productions and creative expressions - material productions are artifacts, objects, and technological systems that people construct to function within their environment Education - cultural ideas, values, beliefs, traditions, attitudes are passed through education - better educated locations tend to attract higher paying and skilled positions Social structure - the pattern of social arrangements and organized relationships that characterize a society - individuals: western culture emphasize individualism and individual success - family: influence business activities such as China, family owned and inherited business is common - reference groups: people's social status is defined by group, such as apple worker identify themselves as by their company - social stratification: individuals are classified within classes depending on occupation, income level, family history, ex: upper strata is government - social mobility: refers to the ease with which a person can move up within social strata Role of language and religion in culture Verbal language - national languages, dialects, and translation tend to complicate verbal communication, it is sometimes difficult to find words to convey the same meaning in a different language Nonverbal communication - facial expressions and gestures such as body movement, eye contact - different expressions have different meanings in different cultures Religion - a system of common beliefs or attitudes concerning a being or a system of thought that people consider sacred, divine - religion affiliations help create bonds of trust and shared commitment which facilitate trade Models and explanations of culture Cultural metaphors - a distinctive tradition or institution that is strongly associated with a particular society. It is a guide to deciphering people’s attitudes, values, and behavior - ex: American football is a cultural metaphor: being a team player with a strong leader who moves an organization toward a desired goal High - low context cultures Low context - rely heavily on spoken words and detailed verbal explanations, Europeans and North Americans - communication is direct, meaning is staightforward High context - emphasize nonverbal messages and view communication as a mean to promote smooth, harmonious relationships - China, Japan Hofstede's research on national culture, 6 dimentions 1. Individualism vs Collectivism - whether a person functions primarily as an individual or as part of a group 2. Power distance - how a society deals with inequalities in power that exist among people 3. Uncertainty avoidance - refers to the extent to which people can tolerate risk and uncertainties 4. Masculinity vs Femininity - refers to a society's orientation based on traditional male and female values - masculine cultures tend to value competitiveness, assertiveness, ambition, accumulation of wealth - feminine cultures emphasize nurturing roles, interdependence among people, taking care of the less fortunate 5. Longterm vs Shortterm orientation - the degree to which people and organizations defer pleasure and gratification to achieve longterm success 6. Indulgence vs Restraint - extent to which people try to control their desires and impulses Culture orientations Ethonocentric orientation - using our own culture as the standard for judging other cultures - tend to view their own culture superior Polycentric orientation - host country mindset in which the manager develops a strong attachment to the country in which she or he conducts business Geocentric orientation - global mindset by which the manager can understand a business or market without regard to country boundaries Self reference criterion - tendency to view other cultures through the lens of our own culture - people unconsciously assume that people in other countries experience the world as they do - view their own culture as the norm, everything else may seem strange Critical incident analysis - method for analyzing awkward situations in cross cultural encounters by becoming more objective and developing empathy for other points of view Chapter 4 Components of ethical behavior 1. Ethics - Moral principles and values that govern the behavior of people, firms, and governments, regarding right and wrong 2. Corporate social responsibility - A manner of operating a business that meets or exceeds the ethical, legal, commercial, and public expectations of customers, shareholders, employees, and communities 3. Sustainability - Meeting humanity's needs without harming future generations 4. Corporate governance - The system of procedures and processes by which corporations are managed, directed, and controlled Relativism - belief that ethical truths are not absolute, but differ from group to group - a good rule is "When in Rome, do as the Romans do" Normativism - belieft that ethical behavioral standards are universal, firms and individuals should seek to uphold them consistently around the world Ethical challenges in international business 1. Corruption - practice of obtaining power, personal gain, or influence through illegitimate means and usually occurs at others' expense - diminishes trust in public institutions, undermines the rule of law, discourages foreign direct investment How is corruption encountered? - Bribery: occurs when person offers or gives another person gift, cash, or favor in exchange for personal gain - Embezzlement: theft or misuse of funds typically placed in one's care or belonging to one's employer - Fraud: involves worngfully deceiving a person or other party to give up assets or cash - Extortion and blackmail: threats of harm such as false imprisonment, exposure of an individual's secrets - Money laundering: concealment of the origins of funds obtained through illegal means 2. Bribery - common in developing economies, especially common in the global energy, mining, and telecommunications industries - negiative consequences such as illegal logging in Indonesia, poor work conditions in China, poor constructed buildings in Turkey - threat fair competition 3. Unethical management practives - corporate culture that advocates profit over sustainability and human welfare can lead to employee abuse, harmful procedures 4. Harmful global sourcing - procurement of products or services from suppliers abroad - problem such as child labour, harsh working condition, too much pollution 5. Illicit products and Marketing - firms might market defective orharmful products, or engage in unethical marketing practices - flawed products or packaging can harm public heath, safety or environment 6. Intellectual property infringement - are ideas or works that individuals or firms create and includes a variety of discoveries and inventions - trademarks are distinctive signs and indicators that firms use to identify their products and services - copyrights grant protections to the creators of art, music, books, software, movies, and TV shows - patents confer the exclusive right to manufacture, use, and sell products or processes. - piracy and counterfeiting: unauthorized reproduction or use of copyrighted or patented work for financial gain Examples - eliminating child labor - avoiding human rights abuses - protecting environment Examples of sustainable practices - water conservation: companies that depend heavily on water seek ways to recycle used water and minimize waste - reduced energy and fuel consumption: efforts to support the natural environment i nclude regulation of fossil fuel usage and government incentives to use renewable energy sources Role of corporate governance Code of ethics - document that describes the values and expectations that guide decision making by all employees in the firm - should be designed so that employee can identify ethical problems and distinguish between right and wrong actions Code of conduct - translates code of ethics into specific rules regarding behaviours and practices that are prohibited or required - identifies consequences for violations Benefits of coroporate governance - increase employee commitment, - increase customer loyalty and sales, better reputation and brand image - reduce likelihood of government intervention Framework for arriving at ethical decisions Chapter 5 Comparative advantage - Superior features of a nation that provide unique benefits in global competition. These features typically are derived from either natural endowments or deliberate national policies Competitive advantage - Assets or capabilities of a firm that are difficult for competitors to imitate. They are typically derived from specific knowledge, competencies, skills, or superior strategies Why nations trade classical theories 1. Mercantilism - view export as good, imports as bad - argues that national prosperity results from a positive balance of trade by maximizing exports and minimizing imports, explains why nations attempt to run trade surplus - harms consumers because restriciting imports reduces consumer variety, and higher prices 2. Absolute advantage - a country benefits by producing primarily those products in which it has an absolute advantage, those that it can produce using fewer resources than any other country 3. Comparative advantage - it will be beneficial for two countries to trade with each other as long as one is relatively more efficient at producing goods or services needed by the other 4. Factor proportions theory - HO model - suggests that each country should export products that intensively use relatively abundant factors of production and import goods that intensively use relatively scarce factors of production Leontief paradox: suggest that US is capital abundant, should be an exporter of capital intensive products. However Us is exporter of labor intensive goods 5. International product life cycle theory Introduction: new product typically in advanced economy, temporary monopoly Maturity: product inventor mass production and seek to export to other advanced economies, foreign firms begin producing alternative versions, ending inventor's monopoly power Standadization: knowledge about product is widespread, manufacturing has become straightforward. Production shifts to low income countries. 5. New trade theory - trade arises due to economies of scale
