Introduction to MOS 2285
Trevor Hunter
King’s University College
Trevor Hunter
Office:
Hours:
Phone:
E-mail:
Website:
King's University College
FB 303
Mondays, 1:30-3:30
ext. 4338
trevor.hunter@uwo.ca
http://thunter.kingsfaculty.ca/
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Course Materials
Textbook: The International Business
Environment 2nd edition Hamilton & Webster
(available at UWO bookstore)
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MOS 1020 and MOS 2285
• If you have taken MOS 1020 you CANNOT take
MOS 2285 and must drop it immediately
• The courses are anitrequisites which means
that they cannot both be counted toward
completing your degree.
• If you take them both you will be 0.5 credit
short of completing your program and
ineligible to graduate!!!!
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Purpose
• To teach you how to decide whether a given
country is a good place for you to enter
• Understand the meaning of a national
comparative advantage as it relates to your
firm’s needs
• Understand how “why” you are
internationalizing determines “where” you
should go
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Objectives
• To make you aware and understand the macro
forces that shape a country’s relative
comparative advantage
• To teach you how to recognize why a given
country may or may not be a good fit with
your firm’s needs
• To teach you practical analytical tools that can
be used in your career
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What We Will Discuss
• How to determine whether a given country
has a relative comparative advantage
• Answer to the question “where should we
go?”
Question 1: Should we
internationalize?
Strategic:
MOS 4410
King's University College
Question 2:
Where is the
best place to go?
Analysis:
MOS 2285
MOS 2285
Question 3:
How should we go?
Action:
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Teaching Methodology
• Lectures and readings
• Students should look over the lecture slides in
advance and summarize the key points – easier to
study for the exams
• Each class will have assigned readings but they will
mainly be for reference – most testing will be based
on lectures – attendance is VERY IMPORTANT!!
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Evaluation
• Two Tests:
– In-class 20% each (not cumulative)
• Group Presentation
– In-class 30%
• One Final Exam
– In-class 30%
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Why Do Firms Internationalize?
Trevor Hunter
King’s University College
The Nature of Businesses
• Corporations are separate legal entities
• Obligated to their:
1. Owners (shareholders)
2. Customers
3. Employees
4. Community
• Legally required to make as much money as
physically and legally possible
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The Nature of Businesses
• Increase profit to maximize shareholder wealth
• Profit is earned two ways:
– Lowering costs
• More efficient operations
• Procurement of less expensive raw materials
– Increasing revenues
• Innovation – New products or features that create more sales or
higher sales prices
• Creating new markets for entire industry
• Taking share from competitors
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Increasing Profit: Increasing Revenues
Through Innovation
Product A
Profit – 25%
Revenues
$100 000
Costs – 75%
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Increasing Profit: Increasing Revenues
Through Innovation
New and Improved Product A
or Product B
Product A
Profit – 25%
Profit – 25%
Revenues
$125 000
Revenues
$100 000
Costs – 75%
Costs – 75%
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Increasing Profit: Adding Market Share
Market Size Year 1
$10 000 000
13%
13%
17%
57%
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Increasing Profit: Adding Market Share
Market Size Year 2
$20 000 000
Market Size Year 1
$10 000 000
13%
13%
13%
13%
17%
17%
57%
57%
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Increasing Profit: Stealing Market Share
Market Share Year 1
13%
13%
17%
57%
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Increasing Profit: Stealing Market Share
Market Share Year 1
Market Share Year 2
13%
13%
13%
32%
17%
44%
11%
57%
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Increasing Profit: Decreasing Costs Without
Increasing Revenues
Year 1
Profit – 25%
Revenues
$100 000
Costs – 75%
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Increasing Profit: Decreasing Costs Without
Increasing Revenues
Year 1
Year 2
Profit – 25%
Revenues
$100 000
Profit – 40%
Revenues
$100 000
Costs – 75%
King's University College
Costs – 60%
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What Drives Globalization
• Efficiency Drivers – make more money be lowering
costs
– Increased competition
– Investor expectations
• Market Expansion Drivers – make more money by
selling more stuff to more people
– Saturated domestic markets
– Product characteristics that are transferable across borders
– Innovation
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Globalizing – It’s Not So Easy
• Local conditions are still relevant
• What works in one country may not work
in another – it goes beyond products
– What is “service?”
– What is “quality?”
– How do different perceptions effect costs?
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What Facilitates Globalization?
1. The decline of barriers of movement of
goods, services, investment, skills, etc.
2. Technology: computers, transportation,
communications, etc.
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The Business Environment
• Businesses operate in a complex environment,
often full of uncertainty and turmoil
• Uncertainty makes it difficult to operate
efficiently
• Four main aspects of the global business
environment which differ and create
uncertainty and complexity:
–
–
–
–
Social Systems
Political Systems
Economic Systems
Legal Systems
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Social Systems
• The system of shared beliefs, values, customs
and behaviours - culture
• Different cultures have different perspectives
toward many different issues
– Religion
– Human rights
– Role of business
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Political Systems
• The system of national or regional governance
• Collectivism vs. Individualism
– Socialism and Communism
– Individualism
• Democracy vs. Totalitarianism
– Freedom and repression?
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Economic Systems
• The system in which commerce is conducted
• Market Economy
– The Invisible Hand
• Command Economy
– The Visible Hand
• Mixed Economy
– The Gentle Hand
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Legal Systems
• The system through which government
enforces its regulations
• Different Legal Systems
– Common, Civil and Theocratic
• Rule of law or personal whim affects:
– Contracts
– Property Rights
– Intellectual Property
– Product Safety and Liability
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Implications for Businesses
• Operating an international business is a tricky
thing – there are no guarantees
• You have to understand the business
environment into which you are entering very
well if you are going to succeed, but, you still
might fail.
• Knowledge, understanding and patience are
key.
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Why do businesses “go global?”
•
•
•
It’s a bit of a long story . . .
Firms seek to increase profits through
international production and sales
Two general strategies
1. Efficiency: Producing at a lower cost to provide
more value to consumers than competitors
2. Market expansion: Added value products so
consumers will pay more for it, or more
consumers will buy it
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Why do businesses “go global?”
• Efficiency Drivers – make more money be lowering
costs
– Forced to be efficient by:
• Increased competition
• Investor expectations
• Market Expansion Drivers – make more money by
selling more stuff to more people
– Sell to other countries when:
• Domestic markets are saturated
• Product characteristics that are transferable across borders
• Seeking innovation from other sources
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Why do businesses “go global?”
• Firms can become more efficient or expand
their markets by exploiting their own or
another country’s National Comparative
Advantage
– Different resource endowments or competencies
or cost advantages that are prevalent within and
relatively unique to a given country or society.
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National Comparative Advantage
Identifying a Nation’s Comparative Advantage
Strategy,
Structure &
Rivalry
Factor
Endowments
Demand
Conditions
Related &
Supporting
Industries
Source: M. Porter
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National Comparative Advantage
• Examples of National Comparative
Advantages:
– India – software development, IT services
– Germany – product engineering, chemicals
– Japan – micro electronics, automobiles
– Switzerland – banking, pharmaceuticals
– Mexico – auto parts
– Canada - ?
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National Comparative Advantage
• Depending upon what makes up a country’s
national comparative advantage, it may be a
good or bad place for a firm to internationalize
• Whether the country “fits” the firm’s needs
depends upon what the firm needs to
compete – a strategic decision
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National Comparative Advantage
• Outsourcing: Refers to the tendency among
many firms to source goods and services from
different locations around the globe
• Firms evaluate the costs of production in
different regions and move facilities around if
the costs rise in one area vs. another
(portfolio perspective)
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National Comparative Advantage
• If there is a fit, a country’s national
comparative advantage can provide benefits
in terms of either improved efficiency or
increased market share or both through:
– Location Economies
– Economies of Scale
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Location Economies
• Operating internationally allows firms to gain
greater efficiencies by capturing Location
Economies:
– Locating different value chain activities in the
optimal location (regardless of which country it is)
to capitalize on lower factor costs (labour, raw
materials, transportation, regulatory compliance
etc.)
– Differentiation by locating in a country to access
or capitalize on a specialized skill or reputation
associated with an activity or product.
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Location Economies
• The firm as a value chain
– a series of distinct value creation activities
• Two types of activities
– Primary: what the firm does to create, market,
deliver and service the product
– Support: activities that support the primary
activities
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Location Economies
• Examples of Primary Activities:
– Smelting
– Auto manufacturing
– Software design
• Examples of Support Activities:
– IT support
– Inventory distribution
– Human resource practices
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Location Economies
• The efficiency of the primary and support
value chain activities affect the profitability of
the firm
• Doing what you do best – ie. Your “core
competence” is a more efficient use of money
• Higher efficiency = Higher profit
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Location Economies
• Firms tend to maximize efficiency by doing
what gives them their competitive advantage
(primary activities) themselves and what they
have to do to support what they do (support
activities) to places that can do them more
efficiently (ie. cheaper)
– Primary: Apple manufacturing iphones in China
– Secondary: IT services, customer support centres
to India
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Location Economies
• Normally, people will buy cheaper goods of
the same quality
• Competition pushes firms to provide the best
product/service at the lowest price (efficiency)
• The lowest price cannot always be achieved
producing in or buying raw materials in the
home market
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Location Economies
• Other countries may have lower factor costs
• The Two Major Factor Costs:
1. Labour
2. Raw Materials
• To stay competitive and maintain efficiency, firms
may have to move production off-shore or purchase
products produced elsewhere
• Think about what you have that is made in China –
Now, think about how much it would have cost if it
were made in Canada!
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Location Economies – Factor Costs
•
Capturing location economies lowers the
cost of value creation by capitalizing on low
factor costs allowing greater efficiencies
Efficient operations with the same or
expanding revenues increase profits
meaning shareholder wealth is maximized
•
–
This is management’s primary responsibility –
investor expectations drive the search for
efficiency!
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Location Economies – Factor Costs
• If the firm passes on the low costs to its
customers its products will be more attractive
than its competitors providing it with a
competitive advantage allowing it to expand
its market share and gain more sales and
profits
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Location Economies – Differentiation
• Firms can differentiate product offerings by
capitalizing on the particular competency
prevalent in that country
– Knowing that a diamond comes from NWT or
that a car has “German engineering” has some
“value” to the consumer
• Allows firms to maximize revenues by
increasing market share or increasing prices
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Economies of Scale
• Firms may have saturated their home market
with their products to a point where further
profit growth is limited.
• There may be other markets in the world
where they can sell their products.
• The more firms can sell of the same thing the
more efficient (profitable) they will be
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Economies of Scale
• If you are able to sell more of the same
products, you have to make more and the
more you make the lower your cost per unit
through Economies of Scale:
– Reduction in unit costs by producing large
numbers. Cost reduction comes from more
efficient use of equipment and experience.
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Economies of Scale
Unit
Costs
A
The Experience Curve
B
Accumulated Output
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Investor Expectations
• The drive for economies is based upon the
NEED to increase profits. Competition drives
firms to internationalize in an attempt to
secure existing profits and hopefully increase
them.
• Profits are returned to shareholders – the
investors in/owners of the firms
• More than any other reason, firms
internationalize to meet the wealth
maximization expectations of their
investors
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Investor Expectations
• Time perspective – businesses must plan and
strategize
– The planning horizon for businesses has decreased over
the last 20 years
– Shorter time perspective requires quick fixes and efficiency
• Quarterly rather than annual results
– Every quarter pension funds, institutional investors and
private equity funds demand double-digit growth in EPS,
Profits, Sales
• Business decisions are made by people –
people are boundedly rational and self
interested
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Investor Expectations
• Realities of factor costs for business in North America
and Western Europe make meeting investor
expectations through by operating domestically
impossible
• The only way to meet profit expectations is to move
operations off-shore to a developing country and
exploit lower factor costs – if you don’t meet
expectations you can lose your job
• Investor expectations create a one-way street that
must end in exploitation
– Keep in mind the investors are not just big institutions,
they are you, your families and me too
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Is Globalization Good or Bad
Trevor Hunter
King’s University College
General Arguments – FOR Globalization
• People like stuff (food, clothing, etc). And
they like it cheap.
• Globalization is one way of making stuff more
efficiently (therefore more cheaply)
– Canada can’t grow bananas. So we make
something else and trade with Costa Rica (we do
what WE are good at)
– Comparative advantage
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General Arguments – FOR Globalization
• Worldwide wealth has grown (and therefore
standards of living are up)
– GDP: The total value of all goods and services produced in
a given year (ie. What value was created in terms of
goods/services)
– 1955 – $414.4 billion (2000 USD, globally)
– 1989 – $20 550 billion
– 1999 – $39 081billion
– 2013 - $74.9 trillion: 180 times bigger in 59 years! (source:
http://databank.worldbank.org/data/download/GDP.pdf)
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General Arguments – FOR Globalization
• Longevity and health
– Developed world life expectancy: 76 for men, 82
for women (http://www.who.int/mediacentre/news/releases/2014/world-healthstatistics-2014/en/)
– Infant mortality: 6 out of 1000 births (prob. of not
reaching 5 yrs.) – (15 in 1990)
– There is more opportunity to live better
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General Arguments – FOR Globalization
• Spread the risk of producing something by
doing it around the world
– Therefore if one area stops, somewhere else can
pick it up
– Can secure investment and return better to
maximize shareholder wealth (businesses’ legal
role)
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General Arguments – FOR Globalization
• Globalization is a form of economic/ political
openness
• Allows all players access to a bigger
opportunity (bigger markets = bigger chances
of success)
• An open economy spurs innovation with fresh
ideas from elsewhere
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General Arguments – FOR Globalization
• Global competition and cheap imports keep
prices down, so inflation (the price of goods
going up) isn’t as drastic
• Global competition gives jobs and technology
to areas that normally might not have them
(lifting standards in poorer countries)
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General Arguments – AGAINST Globalization
• Not all people are seeing the increase in wealth
and prosperity:
2013
GDP (USD)
http://wdi.worldbank.or
g/table/1.1
% of
Global
GDP
GDP per head Population % of
2011 (USD)
Global
Population
Developed
51.347 trn
68.2%
39,312
1,306,100
18%
Developing
24.04 trn
31.8%
4,131
5,818,400
82%
Total
75.26 trn
100%
10,564
7,124,500
100%
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General Arguments – AGAINST Globalization
• Not all people are seeing the increase in wealth
and prosperity:
Wealth Range
2013
Number of
Adults (2010)
% of World
Population
Total Wealth
% of World
> USD 1
million
32 million
(24.2)
0.7%
(0.5 %)
USD 98.7 trn
(69.2 trn)
41%
(35.6%)
USD 100,000 –
1 million
361 million
(334 million)
7.7%
(7.5 %)
USD 101.8 trn
(85 trn)
42.3%
(43.7%)
USD 10,000 –
100,000
1.066 billion
(1.045 billion)
22.9%
(23.5 %)
USD 33 trn
(32.1 trn)
13.7%
(16.5 %)
< USD 10, 000
3.207 billion
(3.038 billion)
68.7%
(68.4%)
USD 7.3 trn
(8.2 trn)
3.0%
(4.2%)
Source: https://publications.credit-suisse.com/tasks/render/file/?fileID=BCDB1364-A105-0560-1332EC9100FF5C83
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General Arguments – AGAINST Globalization
• Longevity and health
– Developing world life expectancy: 62 for males,
and in many countries doesn’t reach 60 (45 for
Sierra Leone)
– Infant mortality more than 82 out of 1000 births –
(182 in Sierra Leone, 503 out of 1000 women in
Lethoso will die between the ages of 15-60)
• There is less opportunity to live better if you
are poor
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General Arguments – AGAINST
Globalization
• International policies and decision-making
powers aren’t in the hands of the people
– Should we tie our laws and social norms to economic
concerns?
• Pandering to corporations “at all costs”
• WTO, IMF, World Bank aren’t entirely
“accountable” to the public and are secretive
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General Arguments – AGAINST
Globalization
• Globalization is actually CREATING poverty
and keeping them poor
– Sweatshops for Reebok, Nike, The Gap, Liz
Claiborne, Wal-Mart, etc.
– Many countries keep labour standards low to keep
firms there (or they go somewhere else)
– Unequal distribution of wealth and ownership
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General Arguments – AGAINST
Globalization
• The environment isn’t on the agenda
– Many countries have different environmental
laws (lower, higher standards)
– Helps attract manufacturing but doesn’t help the
people or environment
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General Arguments – AGAINST
Globalization
• Causes a lot difficulties during transition (it’s
happens but it’s too quick)
– As manufacturing leaves high cost areas, the
people left behind are in trouble
– When economic and political systems chance
rapidly in countries that are not socially prepared
major problems can arise. (Russia)
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What should the Role of Globalization and
MNCs in Society Be?
•
•
•
•
Profit at all cost?
Employment
Maximize shareholder wealth
Make the world a better place through
innovation, charity etc.
• Regardless of what you think of business it has
an IMPORTANT role!
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There are two sides here.
• There are definitely good and bad aspects.
• As a citizen of the world and consumer must
realize that:
You will influence and create change.
The better understanding you have of the
problems the easier it is to make it better.
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