INTRODUCTION INTERNATIONAL BUSINESS ● The performance of trade and investment activities by firms across national borders ● Cross-border business ● Transactions are devised and carried out across national borders to satisfy the objectives of individuals, companies and organizations ● The economic system of exchanging goods and services, conducted between individuals and business in multiple countries TYPES ● ● ● ● ● Export-Import trade Foreign Direct Investment (FDI) Licensing Franchising Management of contract LICENSING ● A business arrangement in which one company gives another company permission to manufacture its product for a specified payment. FRANCHISING The methods of practicing and using another person’s business philosophy Franchisor grants the independent operator the right to distribute its products, techniques, and trademarks for a percentage of gross monthly sales and a royalty fee Various tangibles and intangibles such as national or international advertising, training, and other support services are commonly made available by the franchisor Agreements typically last from five to thirty years, with premature cancellations or terminations of most contracts bearing serious consequences for franchisees Management Contracts An agreement between investors or owners of a project, and a management company hired for coordinating and overseeing a contract An agreement by which a company will provide its organizational and management expertise in the form of services. GLOBALIZATION ● ● ● ● The increasing integration of economies around the world through trade, financial flows, movement of people and ideas facilitated by the revolution in telecommunication and transportation Interdependence of countries around the world Increase in the efficiency of business firms worldwide to withstand international competition. Leads to compression of time and space GLOBALIZATION RELATED TRENDS 1 Unprecedented growth of international trade 3 Development of highly sophisticated global financial systems and mechanisms that facilitate the crossborder flow of products, money, technology, and knowledge 2 Trade between nations is accompanied by 4 Greater degree of collaboration among nations through multilateral regulatory agencies such as the World Trade Organization (WTO) and the International Monetary Fund (IMF) substantial flows of capital, technology, and knowledge INTERNATIONAL TRADE ● ● The exchange of goods and services among countries Involves both products (merchandise) and services (intangibles) Exports is the sale of products or services from the home country to customers located abroad ➔ Outbound activity Imports (or global sourcing) is the procurement of products or services from suppliers located abroad for consumption in the home country ➔ Inbound activity INTERNATIONAL TRADE WORLD TRADE (2018) ❏ Total trade is USD39.7 trillion ❏ ❏ ❏ Exports was USD20.8 trillion Imports was USD18.9 trillion Top 5 importing countries ❏ ❏ ❏ ❏ ❏ United States China Germany Hong Kong, China United Kingdom INTERNATIONAL TRADE WORLD TRADE (2018) ❏ Top 5 exporting countries ❏ ❏ ❏ ❏ ❏ China United States Germany Japan Republic of Korea ❏ Total trade is 46%of the USD86 trillion global economy INTERNATIONAL TRADE ASEAN TRADE (2016) ❏ Total trade is USD2.2trillion ❏ Exports was 1.15trillion ❏ Imports was 1.09trillion ❏ Total trade is 0.08% of ASEAN GDP Exports (in trillion USD) of ASEAN countries Imports (in trillion USD) of ASEAN countries INTERNATIONAL INVESTMENT ● ● The transfer of assets to another country or the acquisition of assets in that country Assets are the factors of production, such as capital, technology, managerial talent and manufacturing infrastructure TYPES ● International Portfolio Investment ○ ● The passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns as well as diversifying investment risk through multiple markets Foreign Direct Investment (FDI) ○ ○ ○ The internationalization strategy of which the firm establishes the physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant, and equipment A foreign entry strategy practiced by internationally active firms Long-term REASONS FOR UNDERTAKING FDI 1. To set up manufacturing or assembly operations, or other physical facilities; 2. To open a sales or representative office or other facility to conduct marketing or distribution activities; or 3. To establish a regional headquarters. FOREIGN DIRECT INVESTMENT (FDI) ● Can be both inward and outward Inward FDI refers to investments coming into the country Outward FDI are investments made by companies from that country into foreign companies in other countries Net FDI Inflow is the difference between inward and outward that is either positive or negative FACTORS THAT INFLUENCE A COMPANY’ S DECISION TO INVEST 1. Cost. Is it cheaper to produce in the local market than elsewhere? 2. Logistics. Is it cheaper to produce locally if the transportation costs are significant? 3. Market. Has the company identified a significant local market? 4. Natural resources. Is the company interested in obtaining access to local resources or commodities? 5. Know-how. Does the company want access to local technology or business process knowledge? FACTORS THAT INFLUENCE A COMPANY’S DECISION TO INVEST 6. Customers and competitors. Does the company’s clients or competitors operate in the country? 7. Policy. Are there local incentives (cash and noncash) for investing in one country versus another? 8. Ease. Is it relatively straightforward to invest and/or set up operations in the country, or there another country in which setup might be easier? FACTORS THAT INFLUENCE A COMPANY’S DECISION TO INVEST 9. Culture. Is the workforce or labor pool already skilled for the company’s needs or will extensive training required? 10. Impact. How will this investment impact the company’s revenue and profitability? 11. Expatriation of funds. Can the company easily take profits out of the country, or are there local restrictions? 12. Exit. Can the company easily and orderly exit from local investment, or are local laws and regulations cumbersome and expensive? FORMS OF FDI ● Horizontal occurs when a company is trying to open up a new market ○ ● For example, A retailer that builds a store in a new country to sell to the local market Vertical is when a company invest internationally to provide input into its core operations – usually in its home country ○ ○ Backward vertical FDI happens when a firm brings the goods or components back to its home country (i.e., acting as supplier) Forward vertical FDI happens when a firm sell the goods into the local or regional market (i.e., acting as a distributor) Greenfield FDI occur when multinational corporations enter into developing countries to build new factories or stores ➔ It means starting from the beginning. KINDS OF FDI Brownfield FDI is when a company or government entity purchases or leases existing production facilities to launch a new production activity ➔ It means modifying or upgrading existing plans and projects GOVERNMENTS ENCOURAGE FDI THROUGH 1. Financial incentives a. b. Tax incentives Insurance loans 2. Infrastructure 3. Administrative processes and regulatory environment 4. Investment in education 5. Political, economic and legal stability GOVERNMENT REASONS FOR LIMITING FDI 1. 2. 3. 4. 5. Protect local industries and key resources (oil, minerals, etc.) Preserve the national and local culture Protect segments of their domestic population Maintain political and economic independence Manage or control economic growth Policies and rules implemented to restrict FDI ★ Ownership restriction ★ Tax rates and sanctions https://www.rappler.com/business/215642-40-percent-foreign-ownership-public-works-foreign-investment-negative-list RISKS IN INTERNATIONALIZATION RISKS IN INTERNATIONALIZATION Cross-cultural risk refers to the event or situation where a cultural miscommunication puts some human value at stake ● Posed by differences in language, lifestyles, mindsets, customs, and/or religion ● Miscommunication due to cultural differences gives rise to inappropriate business strategies and ineffective relations with customers RISKS IN INTERNATIONALIZATION Country risk (also known as political risk) refers to the potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country ● Includes the possibility of foreign government intervention in firms’ business activities ● Laws and regulations that potentially hinder company operations and performance ● Critical legal dimensions include property rights, intellectual property protection, product liability, and taxation policies. ● Harmful economic conditions, often due to high inflation, national debt, and unbalanced international trade. RISKS IN INTERNATIONALIZATION Currency risk (also referred to as financial risk) refers to the risk of adverse fluctuations in exchange rates Exchange rates is the value of one currency in terms of another ● ● ● When currencies fluctuate significantly, the value of the firm’s assets, earnings, and operating income can be reduced The cost of importing parts or components used in manufacturing finished products can increase dramatically if the value of the currency in which the imports are denominated rises sharply Inflation and other harmful economic conditions experienced in one country may have immediate consequences for exchange rates due to the growing interconnectedness of national economies. RISKS IN INTERNATIONALIZATION Commercial risk refers to the firm’s potential loss or failure from poorly developed or executed business strategies, tactics, or procedures ● Managers may make poor choices in such areas as the selection of business partners, timing of market entry, pricing, creation of product features, and promotional themes. ● Marketing inferior or harmful products, falling short of customer expectations, or failing to provide adequate customer service may harm the firm’s reputation and international performance. RISKS IN INTERNATIONALIZATION PARTICIPANTS IN INTERNATIONAL BUSINESS Focal firms - the firms that directly initiate and implement international business activity ● Two common types ○ ○ Multinational enterprise (MNE), also known as multinational corporations, is a large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries Small and medium-sized enterprise (SME) are businesses employing less than 200 workers or those with an asset size of no more than Php100 million ■ PARTICIPANTS IN INTERNATIONAL BUSINESS Born global firm, a young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets Non-profit organizations ○ ○ Charitable groups Non-governmental Organizations (NGOs) HOW SMEs SUCCEED IN INTERNATIONAL BUSINESS 1 Smaller firms are often more innovative, more adaptable, and have quicker response times when it comes to implementing new ideas and technologies and meeting customer needs 2 3 4 5 SMEs are better able to serve niche markets around the world that hold little interest for MNEs Smaller firms are usually avid users of new information and communication technologies, including the Internet Smaller firms minimize overhead or fixed investments Smaller firms tend to thrive on private knowledge that they possess or produce Motivations Strategies to Conduct Internationalization 1. Seek opportunities for growth through market diversification. Substantial market potential exists outside the home country. When they diversify into foreign markets, firms can generate sales and profit opportunities that cannot be matched at home. Internationalization can also extend the marketable life of products or services that have reached their maturity in the home country. 2. Earn higher margins and profits. For many types of products and services, market growth in mature economies is sluggish or flat. Competition is often intense, forcing firms to get by on slim profit margins. By contrast, most foreign markets may be underserved (typical of high-growth emerging markets) or not served at all (typical of developing economies). Less intense competition, combined with strong market demand, implies that companies can command higher margins for their offerings. Motivations Strategies to Conduct Internationalization 3. Gain new ideas about products, services, and business methods. International markets are characterized by tough competitors and demanding customers with various needs. Unique foreign environments expose firms to new ideas for products, processes, and business methods. The experience of doing business abroad helps firms acquire new knowledge for improving organizational effectiveness and efficiency. 4. Better serve key customers that have relocated abroad. In a global economy, many firms internationalize to better serve clients that have moved into foreign markets. Motivations Strategies to Conduct Internationalization 5. Be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products. Companies in extractive industries such as petroleum, mining, and forestry establish international operations where these raw materials are located. In addition, some firms internationalize to gain flexibility from a greater variety of supply bases. Moreover, it allows the firm to skillfully manage currency exchange rate fluctuations. 6. Gain access to lower-cost or better-value factors of production. Internationalization enables the firm to access capital, technology, managerial talent, labor, and land at lower costs, higher-quality, or better overall value at locations worldwide. Motivations Strategies to Conduct Internationalization 7. Develop economies of scale in sourcing, production, marketing, and R&D. Economies of scale refer to the reduction of the per-unit cost of manufacturing and marketing due to operating at high volume. By expanding internationally, the firm greatly increases the size of its customer base, thereby increasing the volume of products that it manufactures. On a per-unit-of-output basis, the greater the volume of production, the lower the total cost. Economies of scale are also present in R&D, sourcing, marketing, distribution, and after-sales service. 8. Confront international competitors more effectively or thwart the growth of competition in the home market. International competition is substantial and increasing, with multinational competitors invading markets worldwide. The firm can enhance its competitive positioning by confronting competitors in international markets or preemptively entering a competitor’s home markets to destabilize and curb its growth. Motivations Strategies to Conduct Internationalization 9. Invest in a potentially rewarding relationship with a foreign partner. Firms often have long-term strategic reasons for venturing abroad. Joint ventures or project based alliances with key foreign players can lead to the development of new products, early positioning in future key markets, or other long-term, profitmaking opportunities. INTERNATIONAL BUSINESS AND ECONOMIC WELLBEING ★ Contributes to economic prosperity and standards of living ○ ○ ○ ○ International trade is the engine of job creation Strong relationship between a nation’s level of prosperity and its participation in cross-border trade and investment Spread national prosperity and abundance beyond advanced economies into developing economies Prosperity is accompanied by gains in literacy rates, nutrition, and health care ★ Provides interconnectedness to the world economy INTERNATIONAL BUSINESS AND ECONOMIC WELL-BEING ★ Access a range of valuable intermediate and finished products and services ★ Helps countries use their resources more efficiently ★ Promote freedom and democracy and may reduce the likelihood of crossborder conflict ○ reducing world poverty and increasing interactions that help soothe relations among nations.
