Unit 01 Introduction to Business & Management Corresponds to chapter 5 and 7 of the Textbook: Understanding Business, 11th Ed. By William G. Nickels, James M. McHugh and Susan M. McHugh Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 1-1 Contents: Part 1: Business: ▪ Definition ▪ Nature and Objectives of Business ▪ Business, Profession and Employment ▪ Classification of Business Activities-Industry and Commerce. Part 2: Forms of Business Organizations ▪ Sole Proprietorship ▪ Partnership ▪ Company Part 3: Fundamentals of Management ▪ Managers and Management ▪ Levels of Managers ▪ Functions and Roles of Manager Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 1-2 Part I Business: An Introduction What is Business? A business is a legal entity that is set-up or designed to make and sell goods, or provide a service. Or A business (also known as enterprise or firm) is an organization engaged in the trade of goods, services, or both to consumers. 1-3 Part I Business: An Introduction Human Activities Economic Activities Non-Economic Activities 1. Business 2. Profession 1. Personal 2. Social 3. Employment 3. Religious Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 1-4 Part I Business: An Introduction Human Activities (Points to Remember) All human activities can be classified into 1. Economic Activities and 2. Non-Economic Activities. Economic Activities involve earning of Income. Non-Economic Activities do not involve earning of income. The examples of economic activities are: Business, Profession and Employment. The examples of non-economic activities are: Personal, Social and Religious activities. 1-5 Part I Business: An Introduction Economic Activities Business • • • • • • • Trade Industry Banking Transportation Insurance Warehousing Advertising, etc. Profession Employment Medical Legal Accounting Engineering Management, etc. Manager Foreman Driver Clerk Salesperson Worker, etc ➢ Points to Remember: • Business: Dealing in goods or services on a regular basis to earn Profits. Examples: Companies, Partnership Firms, Individual Business etc. • Profession: Activities requiring specialized knowledge and skills. • Examples: Doctor, Engineer, Lawyers etc. Employment: Working for others in return of wages or salaries. Examples: Worker, Salesperson, Foreman etc. Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 1-6 Part I Business: An Introduction Nature of Business: ◦ Business is a type of economic activity. ◦ Dealing in Goods & Services. ◦ Production, Distribution of Goods & Services. ◦ Satisfaction of Customer’s Wants. ◦ Regular Dealings. ◦ Profit Motive. ◦ Element of Risk. Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 1-7 Part I Business: An Introduction Objectives of Business Economic Objectives • Earning of Profits • Effective utilization of resources • Creation of Customers/Markets • Innovation Human Objectives Social Objectives Supply of quality Goods Fair Prices Generation of Employment Protection of Environment Fair dealings Employees welfare Job Satisfaction Develop new skills Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 1-8 Part I Business: An Introduction Comparison of Business, Profession and Employment BASIS 1. Nature of Work 2. Motive BUSINESS PROFESSION Production or Purchase Personalized services of and Sale of Goods and expert nature. Services. Earning Profit is the basic Rendering services and motive. charge of fee. No formal qualifications 3. Qualifications are required. EMPLOYMENT Performing the job assigned by the employer. Earning salaries or wages. Professional qualifications Qualification needed as and Training are essential. required by the employer. 4. Investment Adequate Capital is needed. Limited capital required. 5. Risk or Loss Greater degree of risk of Risk of not earning of loss. Professional fee. No capital is required at all. No risk, so long as employment continues. Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 1-9 Part I Business: An Introduction CLASSIFICATION OF BUSINESS ACTIVITIES INDUSTRY COMMERCE TRADE AIDS TO TRADE ➢ Points to Remember: INDUSTRY: Industry includes those economic activities which are concerned with Production, Conversion, Processing or Extraction of products. Examples: Automobile Industry, IT Industry, Construction Industry & Oil Industry etc. COMMERCE: Commerce is the sum total of all those activities which are concerned with the transfer of goods & services from the producers to the consumers. It includes - Trade and Aids to Trade, which facilitates exchange of goods & services. Examples of Trade: Shops, Super Markets, Trading Companies etc Examples of Aids to Trade: Transport, Banking, Warehousing, Insurance, Communication & Advertising etc 110 Part II: Forms of Business Forms of Business Organization Sole Proprietorship Partnership Company Points to Remember: ➢ Sole Proprietorship: A sole trader is a person who carries on a business exclusively on his own account and at his own risk. It is also known as Individual Proprietorship, Single Entrepreneurship and One man business. ➢ Partnership: A partnership is an association of two or more persons who carry on business together for the purpose of making profits. Company: A company is an artificial person created by law. It has separate legal 1existence, perpetual succession and common seal. 11 Part II: Forms of Business Nature of Sole Proprietorship: A sole proprietorship is owned by an individual. It has no separate legal entity independent of the owner. In sole proprietorship, the capital is employed by the owner himself from his personal resources. It is quite easy to start a sole proprietorship business. The Sole Proprietor bears all the risks of the business. Sole proprietorship is a one man show. The owner takes all the decisions of the business. Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 112 Part II: Forms of Business Sole Proprietorship Merits Demerits 1-Easy Formation 1- Limited capital 2- Flexibility 2- Unlimited Liability 3-Quick Decision making 3- Limited Managerial Ability 4-Greater Secrecy 4- Unsound Business Decisions 5-Personal touch 5- Non availability of Economies of large scale 6-Minimum Government Regulations 6- Uncertain life of Business 1-13 Part II: Forms of Business Nature of Partnership: There must be at least two persons to form a partnership. The relation of partnership arises from an Agreement. The profit or loss involved in running a partnership is borne by all partners. All the partners bear unlimited liability with regards to all debts and obligations of the business. Shared decision making and control in the business. 114 Part II: Forms of Business Partnership Merits Demerits 1-Easy Formation 1- Possibility of Conflict among partners 2-Large Financial Resources 2- Unlimited Liability 3-Better Management 3- Less capital as compared to company 4-Better Decision making 4- Delay in decision making 5-Sharing of Risks 6-Easy Closure Copyright © 2009 Pearson Education, 1-15 Inc. publishing as Prentice Hall Part II: Forms of Business Nature of Company: A company is an artificial person created by law. After registration, the company gets the status of a legal person/entity. A company enjoys a separate legal identity which means that it has existence independent of its members. A company has a perpetual succession. Its existence is not affected by the death of its members. The liability of every member is limited to value of shares held by them. The common seal of a company is affixed on all important documents as a token of company’s approval. Separation of ownership and management is an important 1-16 feature of a Company (Professional Management). Part II: Forms of Business Company Merits Demerits 1-Huge Financial Resources 1- Complex procedure of Formation 2-Limited Liability 2- Government Regulations 3-Perpetual Existence 3- Lack of Secrecy 4-Transferability of Shares 4- Lack of personal touch 5-Professinal Management 5- Fraudulent Practices 6-Scope for Expansion 6- Difficulty in wind up 117 Part II: Forms of Business Types of Companies Private limited Company Public limited Company Government Company International/Multinational Company (MNC) Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 118 Part 3: Fundamentals of Management How Are Managers Different from Non-managerial Employees? • Non-managerial Employees – People who work directly on a job or task and have no responsibility for overseeing the work of others. – Examples, Engineer, electrician, Teacher, Data entry clerk, cashier, security guard etc. • Managers – Individuals in organizations who direct the activities of others. – Examples: Project manager, Office Manager, Operations Manager, Marketing Manager, Hospital Manager Copyright ©2011 Pearson Education 1-19 Copyright ©2011 Pearson Education 1-20 What Titles Do Managers Have? • Top Managers – Responsible for making decisions about the direction of the organization. – Examples; President, Chief Executive Officer, VicePresident • Middle Managers – Manage the activities of other managers. – Examples; District Manager, Division Manager • First-line Managers – Responsible for directing non-managerial employees – Examples; Supervisor, Team Leader, Store Manger Copyright ©2011 Pearson Education 1-21 What Is Management? • Management – The process of getting things done effectively and efficiently, with and through people • Effectiveness – “Doing the right things”, doing those tasks that help an organization reach its goals • Efficiency – Concerned with the means, efficient use of resources like people, money, and equipment Copyright ©2011 Pearson Education 1-22 Copyright ©2011 Pearson Education 1-23 What Do Managers Do? Four Management Functions • Planning – Defining the organizational purpose and ways to achieve it • Organizing – Arranging and structuring work to accomplish organizational goals • Leading – Directing the work activities of others • Controlling – Monitoring, comparing, and correcting work performance Copyright ©2011 Pearson Education 1-24 Copyright ©2011 Pearson Education 1-25 What Roles Do Managers Play? Henry Mintzberg observed that a manager’s job can be described by ten roles performed by managers in three general categories • Interpersonal Roles – Figurehead, Leader, and Liaison • Informational Roles – Monitor, Disseminator and Spokesperson • Decisional roles – Entrepreneur, Disturbance Handler, Resource Allocator and Negotiator Copyright ©2011 Pearson Education 1-26 Copyright ©2011 Pearson Education 1-27 What Skills Do Managers Need? Robert Katz and others describe four critical skills in managing • Conceptual Skills – Used to analyze complex situations • Interpersonal Skills – Used to communicate, motivate, mentor and delegate • Technical Skills – Based on specialized knowledge required for work • Political Skills – Used to build a power base and establish connections Copyright ©2011 Pearson Education 1-28 Is The Manager’s Job Universal? The previous discussion describe management as a generic activity. In reality, a manager’s job varies along several dimensions • Level in the Organization – Top level managers do more planning than supervisors • Profit vs. Nonprofit – Management performance is measured on different objectives Copyright ©2011 Pearson Education 1-29 Is the Manager’s Job Universal? (cont’d) Size of the Organization ◦ Small businesses require an emphasis in the management role of spokesperson National Borders ◦ These concepts work best in English-speaking countries and may need to be modified in other global environments Copyright ©2011 Pearson Education 130 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 131 Unit 2 Globalization Corresponds to Chapter 1 of the textbook: International Business: Competing in the Global Marketplace, 8 th Ed. By Charles W. L. Hill McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. LEARNING OBJECTIVES Understand the difference between domestic and international business. Understand what is meant by the term globalization. Be familiar with the main drivers of globalization. Appreciate the changing nature of the global economy. Understand the main arguments in the debate over the impact of globalization. McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. What is an International Business? ❖International Business – ➢ a business whose activities are carried out across national borders ❖Foreign Business – ➢ the operations of a company outside the home or domestic market ❖International Company (IC) – ➢ a business whose activities are carried out across national borders ➢either a global or multinational company 1-3 What is an International Business? ❖ Global Company (GC) – ➢an organization that attempts to standardize and integrate operations worldwide in most or all functional areas ❖ Multi-domestic or Multinational Company (MDC or MNC) ➢ an organization with multi-country affiliates, each of which formulates its own business strategy based on perceived market differences 1-4 Managing an International Business ❖Managing an international business differs from managing a domestic business because ❖countries are different ❖the range of problems confronted in an international business is wider and the problems are more complex than domestic business ❖firms have to find ways to work within the limits imposed by government intervention in the international trade and investment system ❖international transactions involve converting money into different currencies 1-5 What Is Globalization? ❖The world is moving away from selfcontained national economies toward an interdependent, integrated global economic system ❖Globalization refers to the shift toward a more integrated and interdependent world. 1-6 What Is Globalization? Globalization Political Social Economy Ecological/ Environmental Globalization of Markets Globalization of Production 1-7 What is The Globalization of Markets? ❖Historically distinct and separate national markets are merging ❖It no longer makes sense to talk about the “German market” or the “American market” ❖Instead, there is the “global market” ❖ falling trade barriers make it easier to sell globally. ❖consumers’ tastes and preferences are converging on some global norm ❖firms promote the trend by offering the same basic products worldwide 1-8 What Is The Globalization of Production? ❖ Sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production like land, labor, and capital. ❖ Companies can ❖ lower their overall cost structure ❖ improve the quality or functionality of their product offering 1-9 Globalization: Is it Good or Bad? ❖Supporters believe that increased trade and crossborder investment mean ❖ lower prices for goods and services ❖ greater economic growth ❖ higher consumer income, and more jobs ❖Critics worry that globalization will cause ❖ job losses ❖ environmental degradation ❖ the cultural imperialism of global media and MNEs ❖Anti-globalization protesters now regularly show up at most major meetings of global institutions 1-10 How Does Globalization Affect Jobs And Income? ❖Critics argue that falling barriers to trade are destroying manufacturing jobs in advanced countries ❖Supporters contend that the benefits of this trend outweigh the costs ❖ countries will specialize in what they do most efficiently and trade for other goods—and all countries will benefit 1-11 How Does Globalization Affect Labor Policies And The Environment? ❖Critics argue that firms avoid costly efforts to adhere to labor and environmental regulations by moving production to countries where such regulations do not exist, or are not enforced. ❖Supporters claim that tougher environmental and labor standards are associated with economic progress ❖as countries get richer from free trade, they implement tougher environmental and labor regulations 1-12 How Does Globalization Affect National Sovereignty? ❖Today’s interdependent global economy shifting economic power away from national governments toward supranational organizations like the WTO, the EU, and the UN? ❖Critics argue that unelected bureaucrats have the power to impose policies on the democratically elected governments of nation-states ❖Supporters claim that the power of these organizations is limited to what nation-states agree to grant ❖the power of the organizations lies in their ability to get countries to agree to follow certain actions 1-13 How does Globalization Affect The World’s Poor? ❖Is the gap between rich nations and poor nations is getting wider? ❖Critics believe that if globalization was beneficial there should not be a divergence between rich and poor nations ❖Supporters claim that the best way for the poor nations to improve their situation is to; ❖reduce barriers to trade and investment ❖implement economic policies based on free market economies 1-14 What Is Driving Globalization? 1. The decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II. ❖since 1950, average tariffs have fallen significantly and are now at 4 percent ❖countries have opened their markets to FDI 2. Technological change ❖microprocessors and telecommunications ❖the Internet and World Wide Web 3. Transportation 1-15 Declining Trade And Investment Barriers Average Tariff Rates on Manufactured Products as Percent of Value 1-16 What Does Globalization Mean For Firms? ❖ Lower barriers to trade and investment mean firms can ❖ View the world as their market, rather than a single country, ❖ base production in the optimal location for that activity 1-17 What Does Globalization Mean For Firms? ❖ Technological change means ❖lower information processing and communication costs - firms can create and manage globally dispersed production systems ❖low cost global communications networks - help create an electronic global marketplace ❖global communication networks and global media create a worldwide culture, and a global market for consumer products. ❖ Modern Transportation means - lower transportation cost- firms can disperse production to economical, geographically separate locations ❖low-cost transportation - help create global markets 1-18 The Changing Demographics Of The Global Economy ❖ There has been a drastic change in the demographics of the world economy in the last 30 years ❖ Two trends are important: 1. the Changing World Output and World Trade Picture 2. the Changing Foreign Direct Investment Picture 1-19 How Has World Output And World Trade Changed? ❖In 1960, the United States accounted for over 40% of world economic activity ❖By 2008, the United States accounted for just over 20% of world economic activity ❖A similar trend occurred in other developed countries ❖The share of world output accounted for by developing nations is rising and is expected to account for more than 60% of world economic activity by 2020 1-20 How Has World Output And World Trade Changed? The Changing Demographics of World GDP and Trade 1-21 How Has Foreign Direct Investment Changed Over Time? ❖In the 1960s, U.S. firms accounted for about twothirds of worldwide FDI flows ❖Today, the United States accounts for less than one-fifth of worldwide FDI flows ❖Other developed countries have followed a similar pattern ❖In contrast, the share of FDI accounted for by developing countries has risen ❖Developing countries, especially China, have also become popular destinations for FDI 1-22 How Has Foreign Direct Investment Changed Over Time? Percentage Share of Total FDI Stock 1980-2007 1-23 Why Do We Need Global Institutions? ❖Global Institutions ❖help manage, regulate, and police the global marketplace ❖promote the establishment of multinational treaties to govern the global business system ❖Examples include ❖the General Agreement on Tariffs and Trade (GATT) ❖the World Trade Organization (WTO) ❖the International Monetary Fund (IMF) ❖the World Bank ❖the United Nations (UN) 1-24 What Do Global Institutions Do? ❖ The World Trade Organization – WTO (1995) ❖ Makes polices for the world trading system ❖makes sure that nation-states adhere to the rules laid down in trade treaties ❖promotes lower barriers to trade and investment ❖ The International Monetary Fund- IMF (1944) maintains order in the international monetary system ❖ The World Bank (1944) promotes economic development ❖ The United Nations- UNO (1945) ❖maintains international peace and security ❖develops friendly relations among nations ❖cooperates in solving international problems and in promoting respect for human rights ❖is a center for harmonizing the actions of nations 1-25 Unit 03 National Differences in Political Economy Corresponds to Chapter 2 of the textbook: International Business: Competing in the Global Marketplace, 8 th Ed. By Charles W. L. Hill McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. What Is A Political Economy? ❖The political economy of a nation refers to how the political, economic, and legal systems of a country are interdependent ❖they interact and influence each other ❖they affect the level of economic well-being in the nation Political Economy Political System Economic System Legal System 2-2 What Is A Political System? ❖Political system refers to the system of government in a nation ❖ Assessed according to ❖ the degree to which ownership of resources in the country belong to collectivism as opposed to individualism ❖ the degree to which power to make national decision in the country is democratic or totalitarian 2-3 What Is A Political System? Political System Collectivism/ Socialism Individualism Social democrats Totalitarianism Communism Democracy Communist Theocratic Tribal Right-wing 2-4 What Is Collectivism? ❖ Collectivism stresses the primacy of collective goals over individual goals ❖can be traced to the Greek philosopher, Plato (427-347 BC). ❖ Today, collectivism is equated with socialists (Karl Marx 1818-1883) ❖advocate state ownership of the basic means of production, distribution, and exchange ❖manage to benefit society as a whole, rather than individual capitalists 2-5 How Does Modern-Day Socialism Look? ❖ In the early 20th century, socialism split into 1. Communism – socialism can only be achieved through violent revolution and totalitarian dictatorship ❖ in retreat worldwide by mid-1990s 2. Social democrats – socialism is achieved through democratic means ❖ retreating as many countries move toward free market economies ❖ state-owned enterprises have been privatized 2-6 What Is Individualism? ❖Individualism refers to philosophy that an individual should have freedom in his own economic and political pursuits ❖ can be traced to Greek philosopher, Aristotle (384-322 BC), who argued that individual diversity and private ownership are desirable ❖ individual economic and political freedoms are the ground rules on which a society should be based. ❖ implies democratic political systems and free market economies 2-7 What Is Democracy? ❖Democracy refers to a political system in which government is by the people, exercised either directly or through elected representatives ❖usually associated with individualism ❖pure democracy is based on the belief that citizens should be directly involved in decision making ❖most modern democratic states practice representative democracy where citizens periodically elect individuals to represent them ❖ Some of the characteristics of democracies include: freedom of expression, free media, regular elections, and free access to state information. Of course, these freedoms do not exist in totalitarian systems. 2-8 What Is Totalitarianism? ❖ Totalitarianism is a form of government in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties 1. Communist totalitarianism – found in states where the communist party monopolizes power 2. Theocratic totalitarianism - found in states where political power is monopolized by a party, group, or individual that governs according to religious principles 3. Tribal totalitarianism - found in states where a political party that represents the interests of a particular tribe monopolizes power 4. Right-wing totalitarianism - permits some individual economic freedom, but restricts individual political freedom 2-9 What Is An Economic System? ❖ ❖ ❖ ❖ ❖ ❖ ❖ ❖ There are three types of economic systems Market economies - all productive activities are privately owned and production is determined by the interaction of supply and demand government encourages free and fair competition between private producers Command economies - government plans the goods and services that a country produces, the quantity that is produced, and the prices at which they are sold all businesses are state-owned, and governments allocate resources for “the good of society” because there is little incentive to control costs and be efficient, command economies tend to stagnate Mixed economies - certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning governments tend to own firms that are considered important to national security 2-10 What Is A Legal System? ❖ The legal system of a country refers to the rules that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained ❖ There are three types of legal systems 1. Common law - based on tradition, precedent, and custom 2. Civic law - based on detailed set of laws organized into codes 3. Theocratic law - law is based on religious teachings 2-11 How Are Contracts Enforced In Different Legal Systems? ❖ A contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved ❖ Contract law is the body of law that governs contract enforcement ❖ Under a common law system, contracts tend to be very detailed with all contingencies spelled out ❖ Under a civil law system, contracts tend to be much shorter and less specific because many issues are already covered in the civil code ❖ Many countries have ratified the United Nations Convention on Contracts for the International Sale of Goods (CIGS) which establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between buyers and sellers who have their places of business in different nations ❖ Legal System in world countries: https://www.cia.gov/library/publications/the-world2-12 factbook/fields/2100.html How Can Intellectual Property Be Protected? ❖ Intellectual property - refers to creations of the mind: inventions; literary and artistic works; and symbols, names and images used in commerce. Can be protected using. 1. Patents – exclusive rights for a defined period to the manufacture, use, or sale of that invention 2. Copyrights – the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit 3. Trademarks – design and names by which merchants or manufacturers designate and differentiate their products 2-13 How Can Intellectual Property Be Protected? ❖Protection of intellectual property rights differs from country to country ❖World Intellectual Property Organization ❖Paris Convention for the Protection of Industrial Property ❖To avoid piracy, firms can ❖stay away from countries where intellectual property laws are lax ❖file lawsuits ❖convince governments for international property rights agreements and enforcement 2-14 What Is Product Safety And Liability? ❖Product safety laws set certain standards to which a product must adhere. ❖Product liability involves holding a firm and its officers responsible when a product causes injury, death, or damage. ❖When product safety laws are stricter in a firm’s home country than in a foreign country, or when liability laws are more lax, the firm has to decide whether to adhere to home country or host country standards 2-15 What Determines A Country’s Level of Economic Development? ❖ Two ways to measure levels of economic development are 1. Gross national income (GNI) per person 2. Purchasing power parity (PPP) involves adjusting GNI by purchasing power 3. Human Development Index (HDI) by UNO which is based on ❖ life expectancy at birth ❖ educational attainment ❖ whether average incomes are sufficient to meet the basic needs of life in a country 2-16 How Do Countries Compare on Economic Development? Economic Data for Select Countries 2-17 How Does Political Economy Influence Economic Progress? ❖Innovation and entrepreneurship are the engines of long-run economic growth ❖Innovation and entrepreneurship require a market economy and strong property rights ❖Democratic regimes are probably more favorable to long-term economic growth than dictatorships, even the benevolent kind. ❖Subsequent economic growth leads to the establishment of democratic regimes. 2-18 How Do Geography and Education Influence Economic Development? ❖ Countries with favorable geography are more likely to engage in trade, and so, be more open to market-based economic systems, and the economic growth they promote ❖ Countries that invest in education have higher growth rates because the workforce is more productive 2-19 How is The Political Economy Changing? ❖ 1. Since the late 1980s, two trends have emerged Democratic revolution (late 1980s and early 1990s) ❖ ❖ ❖ 2. many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations new information and communication technologies have broken down the ability of the state to control access to uncensored information economic advances of the last 25 years have led to increasingly prosperous middle and working classes who have pushed for democratic reforms A move away from centrally planned and mixed economies ❖ more countries have shifted toward the market-based model 2-20 What is The Nature of Economic Transformation? ❖The shift toward a market-based system involves ❖deregulation – removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate ❖privatization - transfers the ownership of state property into the hands of private investors ❖the creation of a legal system to safeguard property rights 2-21 What Does The Changing Economy Mean For Managers? ❖ Markets that were formerly off-limits to Western business are now open ❖ By identifying and investing early in a potential future economic stars, firms may be able to gain first mover advantages (advantages that accrue to early entrants into a market) and establish loyalty and experience in a country ❖ ex. China -1.2 billion people and India – 1.1 billion people ❖ However, the potential risks are large ❖ It can be more costly to do business in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights 2-22 What Does The Changing Economy Mean For Managers? ❖ Managers must consider 1. Political risk - the likelihood that political forces will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise 2. Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise 3. Legal risk - the likelihood that a trading partner will opportunistically break a contract or expropriate property rights 2-23 How Can Managers Determine A Market’s Overall Attractiveness? ❖The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country ❖Other things being equal, the benefit-cost-risk trade-off is likely to be most favorable in politically stable developed and developing nations that have free market systems and no dramatic upsurge in either inflation rates 2-24 Unit 04 Differences in Culture Corresponds to Chapter 3 of the textbook: International Business: Competing in the Global Marketplace, 8th Ed. By Charles W. L. Hill Introduction Cross-cultural literacy (an understanding of how cultural differences across and within nations can affect the way in which business is practiced) is important to success in international business There may be a relationship between culture and the costs of doing business in a country or region Culture is not static, and the actions of MNEs can contribute to cultural change What is Culture? Culture is a system of values and norms that are shared among a group of people and that when taken together constitute a design for living. Values provide the context within which a society’s norms are established and justified Norms are the social rules that govern the actions of people toward one Culture, Society, and the Nation-State A society can be defined as a group of people that share a common set of values and norms. There is not a strict one-to-one correspondence between a society and a nation-state. ◦ Nation- states are political creations that can contain a single culture or several cultures. (North & South India: Indian Kashmir and Pakistani Kashmir) ◦ Some cultures embrace several nations. (e.g. Arab Countries) The Determinants of Culture The Determinants of Culture Social Structure A society's social structure is its basic social organization. Two dimensions to consider: the degree to which the basic unit of social organization is the individual, as opposed to the group. the degree to which a society is stratified into classes or castes. Individuals and Groups A group is an association of two or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other’s behavior. Groups are common in many Asian societies Many Western countries emphasize the individual Individuals and Groups In societies where the individual is emphasized ◦ individual achievement and entrepreneurship are promoted. ◦ but, this can encourage job switching, competition between individuals in a company rather than team building, and a lack of loyalty to the firm. In societies with a strong identification with the group ◦ cooperation and team work are encouraged and life time employment is common ◦ but, individual initiative and creativity may be suppressed. Social Stratification All societies are stratified on a hierarchical basis into social categories, or social strata (usually defined by characteristics such as family, background, occupation, and income) Societies differ in terms of the degree of mobility between social strata. Social Stratification Social mobility refers to the extent to which individuals can move out of the strata into which they are born. The most rigid system is the caste system (a closed system of stratification in which social position is determined by the family into which a person is born, and change in that position are unlikely). A less rigid system is the class system (a form of open social stratification in which the position a person has by birth can be changed through achievement or luck). Religious and Ethical Systems Religion is a system of shared beliefs and rituals that are concerned with the realm of the sacred. Religions with the greatest following are: Religious and Ethical Systems Ethical systems are a set of moral principles, or values, that are used to guide and shape behavior. The ethical practices of individuals within a culture are often closely intertwined with their religion Christianity is the most widely practiced religion and is common throughout Europe, the Americas, and other countries settled by Europeans Question: What are the economic implications of Christianity? In 1904, Max Weber suggested that it was the Protestant work ethic (focus on hard work, wealth creation, and saving) that was the driving force of capitalism Islam Adherents of Islam, called Muslims, believe that there is one true omnipotent God. Islam is an all-embracing way of life that governs one's being Question:What are the economic implications of Islam? Under Islam, people do not own property, but only act as stewards for God and thus must take care of that they have been entrusted with. While Islam is supportive of business, the way business is practiced is prescribed in AlQuran and Sunnah. Profit making through the exploitation of others, by deception, or by breaking contract/promise is prohibited. Honesty, truthfulness, fairness, benevolence, equality and transparency are some of the Islamic business Ethics. Hinduism Hinduism, practiced primarily on the Indian sub- continent, focuses on the importance of achieving spiritual growth and development, which may require material and physical self-denial. Question: What are the economic implications of Hinduism? Hindus are valued by their spiritual rather than material achievements. Promotion and adding new responsibilities may not be the goal of an employee, or may be infeasible due to the employee's caste. Strong caste system prohibits social mobility. Buddhism Buddhists, found mainly in Central and Southeast Asia, China, Korea, and Japan, stress spiritual growth and the afterlife, rather than achievement while in this world. Question: What are the economic implications of Buddhism? Buddhism does not support the caste system, so individuals do have some mobility and can work with individuals from different classes Entrepreneurial activity is acceptable in Buddhist societies. Confucianism Confucianism, practiced mainly in China, teaches the importance of attaining personal salvation through right action. The need for high moral and ethical conduct and loyalty to others is central in Confucianism Question: What are the economic implications of Confucianism? Three key teachings of Confucianism - loyalty, reciprocal obligations, and honesty - may all lead to a lowering of the cost of doing business in Confucian societies. Language Countries differ in terms of language. There are two forms of language (spoken & unspoken) Language is one of the defining characteristics of culture. Countries with more than one spoken language often have more than one culture. Chinese is the mother tongue of the largest number of people in the world. ◦ English is the most widely spoken language in the world, and is becoming the language of international business However, knowledge of the local language is beneficial, and in some cases, critical for business success Unspoken Language Unspoken language refers to nonverbal cues Unspoken language such as facial expressions and hand gestures can be important for communication Many nonverbal cues are culturally bound and because they may be interpreted differently, can result in misunderstandings Education Formal education is the medium through which individuals learn many of the language, conceptual, and mathematical skills that are essential in a modern society The knowledge base, training, and educational opportunities available to a country's citizens can also give it a competitive advantage in the market and make it a more or less attractive place for expanding business The general education level of a country is a good indicator of the types of products that might sell in that location or the type of promotional materials that might be successful Culture and the Workplace 1. 2. 3. 4. 5. Question: How does a society's culture impact on the values found in the workplace? The most famous study undertaken to answer this question was done by Geert Hofstede who isolated five dimensions that he believed summarized different cultures Power distance Individualism versus collectivism Uncertainty avoidance Masculinity versus femininity Long Term Orientation Culture and the Workplace Power distance is focused on how a society deals with the fact that people are unequal in physical and intellectual capabilities 2. Individualism versus collectivism is focused on the relationship between the individual and his or her fellows 3. Uncertainty avoidance measures the extent to which different cultures socialize their members into accepting ambiguous situations and tolerating ambiguity 4. Masculinity versus femininity looks at the relationship between gender and work roles Hofstede later added a fifth dimension, Long term orientation or Confucian dynamism, to capture attitudes towards time, persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts and favors 1. Culture and the Workplace Hofstede’s Four Dimensions Hofstede’s Dimensions for Saudi Arabia and USA Source: http://geert-hofstede.com/saudi-arabia.html Cultural Dimensions in China Greetings are done in order of age– always greet the eldest member of a group first As status is recognized by age, university degree and profession, use of a person’s title is important. Address someone as Dr. or Professor whenever possible. Do not call someone by their first name until they ask you to. Cultural Dimensions in China Deploy senior staff members to communicate and make announcements to general staff. Be prepared for answers like “we will see,” or “let us think about it” which in the nonconfrontational Chinese society actually mean “no”. Expect frequent rescheduling of meetings. It is a good idea to set up appointments a few weeks in advance and reconfirm 1-2 days before the scheduled meeting Cultural Dimensions in America Time and Its Control: For Americans, time is a critical factor that is battled on a daily basis. We’re in an adversarial relationship to time. We talk about saving or wasting time, managing time and beating the clock. Americans added the term multi-tasking to the English language. Comfort with Change Americans are fundamentally optimistic and place faith in the future. As a young culture with few traditions tying us to ways of the past, our identity and inspiration are projected forward in time. Americans link change to progress, development, and growth. We like things that are “New and Improved!” Self-Sufficiency Closely related to the American emphasis on individual control over destiny is the value of being self-sufficient. To succeed without depending on others shows supreme selfdetermination, self-reliance, and selfconfidence. Status In American culture we value the idea of equality. The quotation “All men are created equal…” is arguably the best-known phrase in any of America’s political documents. Language Americans are low context communicators, so the words we speak are expected to deliver everything that’s important during verbal interaction. We pay far less attention to factors such as body language and the context of what is being said. Americans appreciate communication that gets straight to the point and tend to interrupt when conversation isn’t moving along. Individualism: . Individualism is the belief that each individual’s interests should take precedence over those of the social group. Collectivist cultures, by comparison, assign value based on the role a person plays within a group. Cultural Dimensions in India ❑Respect is based on seniority and not necessarily on proficiency, skills or knowledge ❑ Lay out clear instructions and procedures to employees ❑Expect low job turnover ❑Expect frequent rescheduling of meetings ❑It is a good idea to confirm a day before the scheduled meeting Cultural Dimensions in India Do not expect decisions to be made at meetings, as meetings are merely forums for exchange of information Aim to build lasting relationships. Put your university degree or any accreditations on your business card Cultural Dimensions in Germany Power distance This dimension deals with the fact that all individuals in societies are not equal – it expresses the attitude of the culture towards these inequalities amongst us. Individualism The fundamental issue addressed by this dimension is the degree of interdependence a society maintains among its members. It has to do with whether people´s selfimage is defined in terms of “I” or “We”. In Individualist societies people are supposed to look after themselves and their direct family only. Cultural Dimensions in Germany Masculinity / Femininity Germany is considered a masculine society. Performance is highly valued and early required as the school system separates children into different types of schools at the age of ten. People rather “live in order to work” and draw a lot of selfesteem from their tasks. Managers are expected to be decisive and assertive. Status is often shown, especially by cars, watches and technical devices. Cultural Dimensions in England ‘Please’ and ‘thank you’ are words that should be used a lot. In the UK we consider it rude if you do not use them. If you ask for something, say “please”. If somebody gives you something or helps you, say “thank you” Smoking is prohibited by law in many public places…restaurants, cafes, bars, cinemas etc. If you smoke in these places you will have to pay a fine Many people in Britain do not smoke or are trying to give up smoking. Even if they smoke, it is unusual for people to smoke inside their own house. Cultural Dimensions in England Most of our families do not smoke but they are happy for students to smoke outside - in their garden, for example. British people love pets! If you go to a park it is likely that you will see many people walking their dogs. Dogs are generally domesticated and well behaved so there is no need to be afraid. Queuing…..The British are well know for their love of queues! It is considered very rude to jump a queue. If there is a queue for something, please wait your turn. Hofstede’s Cultural Dimensions in Dubai High power distance – UAE has social statuses that differs on each level e.g. certain ruling families have greater power High Collectivism – UAE has a strong focus on family e.g. during Ramadan, it is very important for them to gather with family relatives. Moderate uncertainty Avoidance – UAE strives a lot in many aspects, yet they do plan ahead. Arab Emirates scores 50 on this dimension and can be considered to be neither Masculine or Feminine. Cultural Change Culture evolves over time, although changes in value systems can be slow and painful for a society. Social turmoil (great disturbance) is an inevitable (unavoidable) outcome of cultural change. As countries become economically stronger, cultural change is particularly common. Implications for Managers Differences in culture imply that 1. there is a need for managers to develop crosscultural literacy 2. there is a connection between culture and national competitive advantage 3. there is a connection between culture and ethics in decision making (discussed in the next chapter) Cross-Cultural Literacy Individuals and firms must develop cross- cultural literacy International businesses that are ill informed about the practices of another culture are unlikely to succeed in that culture. Individuals must also beware of ethnocentric behavior (a belief in the superiority of one's own culture) Culture and Competitive Advantage For international companies, the connection between culture and competitive advantage is important because ◦ the connection suggests which countries are likely to produce the most viable competitors. ◦ the connection has implications for the choice of countries in which to locate production facilities and do business. Thank You!!! To learn more about international business culture, manners & etiquettes Visit: http://www.cyborlink.com Unit 05 The Political Economy of International Trade Corresponds to Chapter 06 of the textbook: International Business: Competing in the Global Marketplace, 8 th Ed. By Charles W. L. Hill McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Chapter Outline ❖What Is The Political Reality of International Trade? ❖How Do Governments Intervene In Markets? ❖Why Do Governments Intervene In Markets? ❖What Do Trade Barriers Mean For Managers? 6-2 What Is The Political Reality Of International Trade? ❖ Free trade occurs when governments do not attempt to restrict what citizens/companies can buy from another countries or what they can sell to another countries . ❖Free Trade is in the mutual benefit of all the nations- for individuals as well as collectively, Then why and how do Governments intervene in markets? 6-3 How Do Governments Intervene In Markets? ❖ Governments use various methods to intervene in markets including (A) Tariff and (B) Non-Tariff Barriers (A) Tariff Barriers 1. Tariffs - taxes imposed on imports that effectively raise the cost of imported products relative to domestic products ❖ Specific tariffs - charged as a fixed charge for each unit of a good imported based on quantity, size, weight, or other factors. ❖ Ad valorem tariffs - charged as a proportion of the value of the imported good- based on the value of the product ❖ Characteristics of Tariffs ❖ increase government revenues ❖ force consumers to pay more for certain imports ❖ are pro-producer and anti-consumer ❖ reduce the overall efficiency of the world economy 6-4 How Do Governments Intervene In Markets? (B) Non-Tariff Barriers 2. Subsidies - government payments to domestic producers ❖ Subsidies help domestic producers ❖ compete against low-cost foreign imports ❖ gain export markets 3. Import Quotas - restrict the quantity of some good that may be imported into a country ❖ Tariff rate quotas - a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota ❖ A quota rent - the extra profit that local producers make when supply (import) is artificially limited by an import quota 6-5 How Do Governments Intervene In Markets? 4. Voluntary Export Restraints - quotas on trade imposed by the exporting country, typically at the request of the importing country’s government ❖ Import quotas and voluntary export restraints ❖ benefit domestic producers ❖ raise the prices of imported goods 5. Local Content Requirements - demand that some specific fraction of a good be produced domestically ❖ benefit domestic producers ❖ consumers face higher prices 6-6 6. How Do Governments Intervene In Markets? Administrative Polices - bureaucratic rules designed to make it difficult for imports to enter a country ❖ polices hurt consumers by limiting choice 7. Antidumping Policies – aka countervailing duties designed to punish foreign firms that engage in dumping and protect domestic producers from “unfair” foreign competition ❖ dumping - selling goods in a foreign market below the production cost in that market, or selling goods in a foreign market below their “fair” market value ❖ enables firms to unload excess production in foreign markets. ❖ may be predatory behavior - producers use profits from their home markets to subsidize prices in a foreign market to drive competitors out of that market, and later raise prices. 6-7 Why Do Governments Intervene In Markets? ❖ There are two main arguments for government intervention in the market 1. Political arguments - concerned with protecting the interests of certain groups within a nation (normally producers, industrialists, businessmen), often at the expense of other groups (normally consumers) 2. Economic arguments - concerned with boosting the overall wealth of a nation – benefits both producers and consumers (By producing and exporting more as compared to importing) 6-8 What Are The Political Arguments For Government Intervention? 1. Protecting jobs - the most common political reason for trade restrictions ❖ results from political pressures by unions or industries that are "threatened" by more efficient foreign producers, and that have more political influence than the consumers who will eventually pay for the intervention. 2. Protecting industries deemed important for national security - industries like aerospace, defense-related industries or electronics are often protected because they are deemed important for national security. 3. Retaliating to unfair foreign competition - when governments take, or threaten to take, specific actions, other countries may remove trade barriers ❖ if threatened governments do not back down, tensions can escalate and new trade barriers may be 6-9 enacted What Are The Political Arguments For Government Intervention? 3. Retaliating to unfair foreign competition – when governments intervene in markets to retaliate against moves made by other governments. ❖China has been under fire in recent years for failing to take proper steps against product piracy. ❖Many nations threatened to implement trade barriers against Chinese products if the practice isn’t stopped. ❖China initially responded to the threats with threats of increasing its own barriers to trade, although it has since backed off. 6-10 What Are The Political Arguments For Government Intervention? 4. Protecting consumers from “dangerous” products – limit “unsafe” products. 5. Furthering the goals of foreign policy - preferential trade terms can be granted to countries that a government wants to build strong relations with ❖ trade policy can also be used to punish rogue states 6. Protecting the human rights of individuals in exporting countries – by exporting more from country through declaring it ‘Most Favorite Nation’ (MFN) in order to uplift the life standard of human being in that nation. ❖ the decision to grant China MFN status in 1999 was based on this philosophy 6-11 What Are The Economic Arguments For Government Intervention? 1. The infant industry argument - an industry should be protected until it can develop and be viable and competitive internationally. ❖ accepted as a justification for temporary trade restrictions under the WTO. ❖ Question: When is an industry “grown up” ? ❖ Critics argue that if a country has the potential to develop a viable competitive position its firms should be capable of raising necessary funds without additional support from the government 6-12 What Are The Economic Arguments For Government Intervention? 2. Strategic trade policy - in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages ❖ governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage 6-13 What Do Trade Barriers Mean For Managers? ❖Managers need to consider how trade barriers affect the strategy of the firm and the implications of government policy on the firm. ❖Trade barriers raise the cost of exporting products to a country ❖ Quotas and Voluntary export restraints (VERs) may limit a firm’s ability to serve a country from locations outside that country 6-14 What Do Trade Barriers Mean For Managers? ❖To conform to local content requirements, a firm may have to locate more production activities in a given market than it would otherwise ❖Managers have an incentive of lobbying the government for free trade. 6-15 Unit 06 Regional Economic Integration Corresponds to Chapter 8 of the textbook: International Business: Competing in the Global Marketplace, 8th Ed. By Charles W. L. Hill Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. What Is Regional Economic Integration? Regional economic integration An agreements between countries in a geographic region to reduce trade barriers (tariff and non-tariff) for the free flow of goods, services, and factors of production between each other. Examples: European Union, GCC and NAFTA Factor of Production include; labor, capital and land 8-2 Why Should Countries Integrate their Economies? Countries integrate because of economic and political reasons. Economic Reason: ◦ All countries gain from free trade and investment ◦ regional economic integration is an attempt to exploit the gains from free trade and investment Political Reason: ◦ Linking countries together, makes them more dependent on each other for free trade ◦ creates incentives for political cooperation and reduces the probability of conflicts ◦ gives countries greater political power when dealing with 8-3 other nations What Are The Levels Of Regional Economic Integration? Levels of Economic Integration 8-4 What Are The Levels Of Regional Economic Integration? 1. A free trade area eliminates all barriers to the trade of goods and services among member countries. ◦ ◦ 2. European Free Trade Association (EFTA) Norway, Iceland, Liechtenstein, and Switzerland North American Free Trade Agreement (NAFTA) - U.S., Canada, and Mexico A customs union eliminates trade barriers between member countries and adopts a common external trade policy ◦ Andean Pact (Bolivia, Columbia, Ecuador and Peru) 8-5 What Are The Levels Of Regional Economic Integration? 3. A common market has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production. ◦ 4. ◦ MERCOSUR (Brazil, Argentina, Paraguay, and Uruguay) An economic union has the free flow of products and factors of production between members, a common external trade policy, a common currency, a harmonized tax rate, and a common monetary and fiscal policy. European Union (EU) 8-6 What Are The Levels Of Regional Economic Integration? 5. A political union that involves a central political apparatus that coordinates the economic, social, and foreign policy of member states. ◦ The EU is heading towards partial political union, and the United States is an example of even closer political union. 8-7 What Limitation Economic Integrations possess? Economic integration can be difficult because ◦ while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose. ◦ it implies a loss of national sovereignty Regional economic integration is only beneficial if the amount of trade it creates exceeds the amount it diverts. ◦ trade creation occurs when low cost producers within the free trade area replace high cost domestic producers. ◦ trade diversion occurs when higher cost suppliers within the free trade area replace lower cost external suppliers. 8-8 What Does Economic Integration Mean For Managers? Regional economic integration bring: Opportunities ◦ Opens new markets ◦ Allows firms to realize cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal. Threats ◦ Within each grouping, the business environment becomes competitive. ◦ There is a risk of being shut out of the single 8-9 market by the creation of a “trade fortress”. UNIT 07 Entry Strategy and Strategic Alliances Corresponds to Chapter 14 of the textbook: International Business: Competing in the Global Marketplace, 8th Ed. By Charles W. L. Hill McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. WHAT ARE THE BASIC DECISIONS FIRMS MAKE WHEN EXPANDING GLOBALLY? Firms expanding internationally must decide 1. Which markets to enter 2. When to enter them 3. On what scale 4. How to enter (Which entry mode to use) Exporting II. Turnkey projects III. Licensing IV. Franchising to a company in the host nation V. Joint venture with a local company VI. Establishing a new wholly owned subsidiary I. 14-2 WHICH MARKET TO ENTER? WHAT INFLUENCES THE CHOICE OF ENTRY MODE? Several factors affect the choice of entry mode including Political Risks Economic Risks Social Risk Technological Risk Trade Barriers Transport Costs Organizational Competencies Firm Entry Strategy The best mode varies by situation – what makes sense for one company might not make sense for another 14-3 WHICH FOREIGN MARKETS SHOULD FIRMS ENTER? The choice of foreign markets will depend on their long run profit potential Favorable markets are politically stable have free market systems have relatively low inflation rates Low trade barriers Less competitive Less desirable markets are politically unstable Tough competition have mixed or command economies High trade barriers Markets are also more attractive when the product in question is not widely available and satisfies an unmet need. 14-4 WHEN SHOULD A FIRM ENTER A FOREIGN MARKET? Once attractive markets are identified, the firm must consider the timing of entry 1. Entry is early when the firm enters a foreign market before other foreign firms and opt for First mover advantage 2. Entry is late when the firm enters the market after other firms have already established themselves in the market 14-5 WHY ENTER A FOREIGN MARKET EARLY? First mover advantages include: The ability to obstruct (block) rivals by establishing a strong brand name. The ability to build up sales volume and achieve economies of scale ahead of rivals and gain a cost advantage over later entrants. The ability to create switching costs that tie customers into products or services making it difficult for later entrants to win business 14-6 WHY ENTER A FOREIGN MARKET LATE? First mover disadvantages include: Pioneering costs - arise when the foreign business system is quite different from that of home market (the firm need more time, efforts and expenses to learning the rules of the game) The costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes The costs of promotion for new type of products and services and establishing a product offering, including the cost of educating customers. 14-7 ON WHAT SCALE SHOULD A FIRM ENTER FOREIGN MARKETS? After choosing which market to enter and the timing of entry, firms need to decide on the Scale Of Market Entry Entering a foreign market on a significant scale is a major strategic decision ▪ that changes the competitive strategy of the firm ▪ it has long term impact on the firm growth. ▪ It depends on organization capability as well. Small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm’s exposure to that market 14-8 HOW CAN FIRMS ENTER FOREIGN MARKETS? 1. These are six different ways to enter a foreign market Exporting - common first step for many manufacturing firms 2. Turnkey projects - the contractor handles every detail of the project for a foreign client, including the training of operating personnel 3. later, firms may switch to another mode at completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation Licensing - a licensor grants the rights of intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee. E.g. Pespi- AlJomaih, 7days-Almarai patents, inventions, formulas, processes, designs, copyrights, trademarks 14-9 HOW CAN FIRMS ENTER FOREIGN MARKETS? Franchising - a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business. E.g. McDonald, KFC, Pizza Hut 4. used primarily by service firms Joint ventures with a host country firm - a firm or product that is jointly owned by two or more otherwise independent firms. E.g. Sony Ericson, Apple-Nike 5. most joint ventures are 50:50 partnerships Wholly owned subsidiary - the firm owns 100 percent of the stock in host country 6. set up a new operation acquire an established firm 14-10 WHICH ENTRY MODE IS BEST? Advantages and Disadvantages of Entry Modes-Summarized WHICH IS BETTER – GREENFIELD OR ACQUISITION? 1. The choice depends on the situation confronting the firm A greenfield strategy - build a subsidiary from the ground up 2. greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture. An acquisition strategy – acquire an existing company acquisition may be better when there are wellestablished competitors or global competitors interested in expanding 14-12 WHAT ARE STRATEGIC ALLIANCES? Strategic alliances refer to cooperative agreements between two firms (it may be potential or actual competitors). E.g. McDonald-Coca Cola, TescoTamimi range from formal joint ventures to short- term contractual agreements the number of strategic alliances has exploded in recent decades. 14-13 WHY CHOOSE STRATEGIC ALLIANCES? Strategic alliances are attractive because they facilitate entry into a foreign market allow firms to share the costs and risks of developing new products or processes bring together complementary skills and assets that neither partner could easily develop on its ownApple and Nike. But, the firm needs to be careful not to give away more than it receives. 14-14 Thank You!!! 14-15
