Global Business Environment:
Going Global to Stay Local?
Lecture 1
The Course
• Why the need for firms to go global?
• Global Business Environment, trends in key indicators
• The Current Scenario in Trade and Investment – theories
and experience
• Evolution of International Institutions and their role in
ensuring Global Business Environment
• Lessons from the Growth Experience across countries /
sectors – what defies or defines success? Which countries
to do business in?
1. The Political Economy – what’s a perfect recipe for success?
2. Soft factors – role of Culture etc.
3. Operational issues: Trade Finance, Global Sourcing
4. Control factor in international business
The References
• ‘International Business’ by Daniels, Radebaugh,
Sullivan and Salwan, Pearson
• ‘International Business’ by Hill and Jain, Tata
Mcgraw-Hill
• ‘International Business’ by Czinkota, Ronkainen and
Moffett, Wiley
• World bank, IMF, UNCTAD and WTO Webresources
• Recent happenings on international business issues
Evaluation Pattern and Schedule
Component
Weight
Class Participation
10
Quiz (Best Two out of three)
20
Group Project Report Presentation
30
End Term Examination
40
Session No
Quizzes and Project Report
4
Quiz No 1
7
Quiz No. 2
10
Quiz No. 3
End Term Examination
Submission of Group Project Report
What is International Business?
• All commercial transactions between two or more
countries (merchandise sales, service contracts,
investments, business, transportation)
– Private (for profits)
– Public (for political / strategic reasons)
• International business adds significant influences to
typical domestic operations
– Physical
– Societal
– Competitive
• International business and globalization
• Globalization: The broadening set of interdependent
relationships among people from different parts of a
world that happens to be divided into nations
IPL, ATP Tours and Football Leagues: Sports or Business?
Difference between Domestic and
International Business
• In additional to domestic business
management skills, international business
management requires
–
–
–
–
Social science understanding
Political science appreciation
Legal awareness (taxation, forex transaction)
And an innate ability in:
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Anthropology (aspirations and demands)
Sociology
Psychology (motivations)
Economics (GDP, inflation, unemployment)
Political Economy (sanctions and terrorism)
Geography (supply and demand factors)
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•
How is International business affected by:
GDP Growth?
Oil Price Movement?
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•
•
•
•
•
•
•
•
What defines Globalization?
Growing Income?
Growing Trade in Goods and Services?
Deepened Production Networks?
Lowering Trade Barriers and Procedural Hassles?
Growing Global Governance?
Increasing Cross-Regional Association?
Deepened Investment Inter-linkage?
More Acquisitions and Mergers?
Increasing International Cooperation in Infrastructure
Projects?
• Movement of Technicians / Managers from another
country?
• Movement of workers from another country?
• No to the policy of ‘Self-Reliance’?
Motivation for consumers: More variety, better
quality, lower prices
The ‘International’ Burger
Sesame seeds
from Mexico
Pickles and
Sauce from
Germany
Onions from
US
Lettuce from
Ukraine
Cheese from
Poland
Bun from
Russia
Beef Patties
from Hungary
Source: Czinkota et al
The fragmentation of production: The example of the Boeing 787 Dreamliner
Source: WTO (2011)
Complementary parts supply system of
an automobile assembler in ASEAN
Source: Hiratsuka (2010)
The Other Side of the Coin?
• Increasing instability owing to International Events? (e.g. US
decision to reduce outsourcing of services from India;
Chinese decision to stop export of rare earth materials to
Japan)
• Growth of a region linked more with the Growth scenario in
other countries? (e.g. the 2009 recession in US and the
impact on Chinese exports)
• Less Control of the Government to influence Domestic Policy
Challenges? (e.g. the Greece crisis and failure to tackle the
problem through Monetary and Fiscal Policies)
• Increasing Privatization?
• Worsening of Income Inequality and Employment Scenario?
(e.g. experience of Sub-Saharan African countries)
• Greater influence by MNCs and external players on local
population and production? e.g. environmental concerns –
Brazil and Amazonian forests; mining sector in Indonesia
Serious challenge to local players??
Global Canvas: GDP Growth
20
China
European Union
India
Japan
United States
15
10
5
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
-5
World Bank Data
-10
• China has established itself as a growing location: More FDI inflow
• What are the prospects of India?
• Does GDP growth influence ability to engage in international business?
Growth in Global Export (Merchandise)
50
India
40
World
30
20
10
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
-10
-20
-30
How has India’s merchandise export suffered, due to imbalances in
Global Market?
Growth in Global Export (Service)
70
India
60
World
50
40
30
20
10
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1991
1992
-10
1990
0
-20
How has India’s service export suffered, due to imbalances in
Global Market?
Who are the prominent exporters? Global
Merchandise Export Market Share (%)
45.00
40.00
US
EU (27)
35.00
China
India
30.00
Japan
25.00
20.00
15.00
10.00
5.00
Is business / trade mainly created by Price difference??
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
0.00
Who are the prominent exporters? Global
Service Export Market Share (%)
60
China
EU
Japan
India
US
50
40
30
20
10
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
0
Is GDP growth affected by external factors, e.g., oil supply?
Recession and Global FDI (US $ Bn.)
WIR (2012)
Global Recession and Commodity Prices
Biggest decreases:
1. Metals
2. Agriculture raw materials
(cotton and rubber)
3. Edible oils
4. Coconut and palmkernel oil
5. Cocoa
• Major Commodity Price boom
in 2008 for several , products.
• Move to Biofuel, Export bans,
Prohibitive taxes etc., supply
and demand mismatch
• Price crash in 2009
• How Economic Boom and
Recession affects
international business?
• Domestic Policy Tightening
• Energy and Metal price
recovery from March 2009,
but longer time taken for
agriculture.
• Commodity prices peaked in
early 2011 and then declined
on concerns about the global
macroeconomic and financial
outlook and slowing demand in
emerging markets, notably
China.
Going Local?
Going Extinct ..
• Local Soft Drinks in many countries are either driven out by
aggressive pricing by MNC giants, Coke and Pepsi, or, bought
/ marginalized by them, e.g. Campa Cola in India
• Synthetic Fibre – increasing Export from China over the
years, increasing import, hurting the interest of the local
producers
• Television market - Indian example – experience of Philips
during 1990s, present battle between Videocon (India),
Sony (Japan), Samsung (South Korea) LG (South Korea) etc.
• Any other example?
The Lesson So Far ..
• No business is now purely ‘internal’ barring few
exceptions, and hence internationalization is an important
strategy for firms given foreign competition
• Globalization is here to Stay
• Countries with limited set of options earn limited
benefits
• Fiscal and Financial health of an economy plays a crucial
role in determining its competitiveness, attractiveness
and hence future growth path
• Country Strength and Business Negotiations with
Partners
• Role of Economic Diversification and moving up the value
chain is important
The Most Competitive Economies..
• India was
ranked 51st as
per 2010-11
Ranking
• That worsened
to 56th position
during 2011-12
• Does
competitiveness
gets affected
by the ease of
doing business?
• DBR 2012
Stronger legal institutions and property rights protections are
associated with more efficient regulatory processes
(Average ranking on sets of Doing Business indicators)
DBR (2012)
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Reasons for Growth in International Business
Rapid expansion of technology - New technology encouraged
newer products and flexible specialization – designed to
produce differentiated products in large patches – Fixed cost
is much less important as compared to 1980s (e.g. – electronic
components industry)
Capturing Economies of Scale – Targeting the Global Market Bulk production in low-skilled products – China produced 45%
shoes of the World
Transportation is quicker while costs are lower - Reduction in
physical cost of transport – containerization, packaging,
Miniaturization – bulkiness reduced – creation of newer
markets (e.g. perishables through air cargo)
Communication enables control from afar - Reduction in
communication cost – internet and mobile phones – Tirupur in
India
Liberal government policies on trade and resources – movement
of capital and labour – reform of sea and airports and customs
framework
Reasons for Growth in International Business ..
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Emergence of services supporting international business –
banking services, postal and courier services
Development of institutions that support international trade,
WTO-induced reform – reduction in tariff level
Consumer pressures (demand for quality features, e-commerce,
lookout for cheaper deals)
Increased global competition - Need to Stay Competitive even
in the Local Market – cost innovations, Merger and Acquisitions
Growing Intra-Industry Trade – The Need to Source the Input
at the Best Competitive Price and Quality
Where and How to Source? Exploitation of key inter-linkages
Product Cycle Hypothesis – Quick Learning for the New
Entrants
Reduction in Storage cost – Just-In-Time mode – so no need to
book the warehouse for 3-4 weeks (precondition: credibility in
providing)
e.g. Integrated Production Network in Southeast Asia
for automobile
Technological progress has reduced the
quantity of commodities used per unit of GDP
Reduction in transportation cost and accessibility of modern
communication technology has a positive impact on trade and growth.
20th Century Revolution
Source: Hummels
Operations and Influences
Why Engage in International Business?
• Expand sales
– Volkswagen (Germany); Ericsson (Sweden); IBM (US)
• Acquire resources
– Better components, services, products (Tata Steel – willing
to set up iron ore or steel mill projects in western Australia
given the natural reserve in that territory; BPO industries
in India and Philippines)
– Foreign capital
– Cheap labour (Rawlings producing baseball in Costa Rica)
– Technologies (Tata Steel – purchase of Corus)
– Information (Zodiac Shirt – purchase of European and
American Brands)
• Minimize risk
– Take advantage of the business cycle for products /
services
– Diversify among international markets
The More people view the Harry Potter Movie, the higher the
sales and profitability.
A Globalized Venture: Harry Potter
Category
Person - Country of Origin
Author
J. K. Rowling (British)
Producer
David Jonathan Heyman (British)
Distributor
Warner Brothers (US)
Director
Christopher Joseph Columbus (US); Alfonso Cuarón
Orozco (Mexico)
Screenplay
Stephen Keith Kloves (US); Michael Goldenberg (US)
Editing
Richard Francis-Bruce (Australia)
Music
Patrick Doyle (Scotland)
Visual
Effects
Rising Sun Pictures (Australia); Double Negative (UK);
Cinesite (UK); Industrial Light & Magic (US)
Actors
From more than 20 countries
Location
UK, Scotland
Question 1
Why simultaneous multiple release of the Movie?
Question 2
Why the recent movies were released in 3D?
And how the countries Gain?
• Lord of the Rings Filming locations in New Zealand are now
great tourist attractions
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Modes of International Business
Importing (Reliance Industries Limited
importing crude oil) and exporting (Tata Motors exports Nano to Sri
Lanka)
Tourism and transportation
Licensing (e.g. Breyers Yogart, TGI Friday's frozen appetizers produced
by unrelated firms under licensing arrangements, Arvind Brnads and
Wrangler in India) and franchising (e.g. Subway, McDonalds, Seven-Eleven
etc.)
Royalties, operating standard and use of brand names
Turnkey operations - seller agrees to put up the plant or business, with his
own financing without initial backing from the buyer, guaranteed to be paid
by the buyer only upon delivery of the fully operational installation, occurs
in franchising – Bechtel in Afghanistan.
Management contracts – persons undertaking certain specialized
management functions in another entity (Disney theme parks in Paris)
Direct (Honda investing in Indian subsidiary Honda-SIEL Cars India) and
portfolio investment (Foreign Institutional Investors in the Stock Market)
International Strategy Lifecycle
Selling Products or Services Outside a Firm’s Domestic Market
2
1
Product Demand
Develops and Firm
Exports Products
Firm Introduces
Innovation in
Domestic Market
5
3
Foreign
Competition
Begins Production
Production Becomes
Standardized and is
Relocated to Low Cost
Countries
4 Firm Begins
Production Abroad
The Location choice of MNCs?
• How can a firm develop to become a global player?
• First step: Sourcing Capital – availability in Developed
countries – the role of the Global Banks – Headquarter
• How can developing countries be able to grow?
• Second step: Sourcing Labour - Developing countries –
securing skilled and unskilled labour, considerations on
infrastructure, human capital etc.
• Can cheap labour come to domestic country and ensure
production?
• Example – Bangladesh Garments Industry - local labour
– Korean FDI
Is FDI all about manufacturing and services?
Role of FDI: Flying Geese Model
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Production - export – FDI - import.
First wave of FDI from Japan to South Korea, Taiwan, Hong
Kong and Singapore (NIEs).
NIEs turned into efficient producers of manufactured
products.
Consequent increase in cost of production.
Second wave of FDI from South Korea and Taiwan to Thailand,
Malaysia and Indonesia. Japanese investment also followed.
Sectoral perspective – move towards more techno-intensive
sectors.
China benefited in the process during 1980s.
Flow to Philippines in next period.
Process suffered during East Asian Crisis.
Recent FDI flow to Cambodia, Lao PDR, Viet Nam.
Importance of being at the right place at the right time
Sequential flying geese paradigm
Sequential flying geese paradigm ..
India’s advantage?
How Did Japanese FDI Travel?
1. Phase 1: 1970s -
2. Phase 2: 1980s -
3. Phase 3: 1990s 4. Phase 2: 2000s -
FDI - Production
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Agri FDI: Recent Trends
Nestlé (Switzerland) had contracts with more than 600,000 farms in
over 80 developing and transition economies as direct suppliers of
various agricultural commodities.
Olam (Singapore) has a globally spread contract farming network with
approximately 200,000 suppliers in 60 countries (most of them
developing countries).
In Brazil, 75% of poultry production and 35% of soya bean production
are sourced through contract farming, including by TNCs.
Sime Darby (Malaysia): $800 million investment in plantations in
Liberia in 2009 (palm oil, rubber).
China: investments and contract farming in commodities like maize,
sugar and rubber in the Mekong region, especially in Cambodia and Lao
PDR.
Zambeef (Zambia): investment in Ghana and Nigeria.
Grupo Bimbo (Mexico): investment across Latin America and the
Caribbean (potato, cereals).
Food security led investment: South Korea and GCC Countries.
Role of SWFs: Agricapital (a State-owned fund based in Bahrain) is investing
in food crops overseas to support its government’s food security policies.
Policy Issue for a country: Export
Promotion or Import Substitution?
X or
M?
www.abanet.org
Empirical Evidence: Reasons behind
Trade and Development Policy Reforms
• Demographic Pressure (increasing population, import
demand)
• Military Compulsions (technological innovations,
increasing government expenditure)
• Export Growth (broadening product base, increasing
productivity, competitiveness of the economy /
select product groups)
• Demonstration Effect (consumerism, increased
consumption)
• Late entry and industrial structure
• Infant Industry and Optimum Tariff Argument
‘Other’ factors for Growth?
• A visionary leader? (e.g. Lee Kuan Yew, Singapore; Deng
Xiaoping, Peoples Republic of China; Suharto, Indonesia)
• Valuable exportable commodity? (e.g. oil in Iran;
manufacturing in China)
• Unpredictable aggressive enemy? (e.g. China for Taiwan;
Russia for China)
• Superpower patron? (e.g. US as patron for Singapore and
Taiwan during 1970s and 1980s)
• ‘Fair’ Trade Regime? (e.g. Chewing gum export in Singapore)
• Business-Friendly Macroeconomic Regime? (difference
between Democratic India, Chile under Augusto José Ramón
Pinochet and China under Communist Party)
• How to Learn from Past Mistakes so as to prevent their
repetition????
‘No matter if it is a white cat or a black cat; as long as it can catch
mice, it is a good cat’ – A Sichuan Proverb used by Deng became
famous
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Levels / Terms of International
Companies - Strategies
Joint Venture (JV): two or three players from more than one country
coming together to form a business – e.g. Sony-Ericsson is a JV by the
Japanese consumer electronics company Sony Corporation and the Swedish
telecommunications company Ericsson to make mobile phones; Walmart and
Bharti Enterprises formed a JV, Bharti Walmart Private Limited.
Multinational Enterprise (MNE): global approach to markets and
production, direct investment in more than one country
– Multinational Corporation (MNC) – e.g. Pepsi
– Transnational Company (TNC) - integrate various country operations
while dispersing the location of control (Transnational strategy), e.g.
Nokia, Nestle
Globally integrated company: integrated operations located in different
countries - integrate various country operations into an international
headquarters control (Global Strategy)
Multidomestic company: multinational companies that allow local
responsiveness – country offices have power to operate autonomously
(Multidomestic strategy) – e.g. McDonald and Maharaja Mac in India
International Corporate Strategy
When is each strategy appropriate?
High
Need for
Global
Integration
MultiDomestic
Low
Low
High
Need for Local Market Responsiveness
International Corporate Strategy
When is each strategy appropriate?
High
Global
Strategy
Need for
Global
Integration
MultiDomestic
Low
Low
High
Need for Local Market Responsiveness
International Corporate Strategy
When is each strategy appropriate?
High
Global
Strategy
Transnational
Need for
Global
Integration
MultiDomestic
Low
Low
High
Need for Local Market Responsiveness
Standardized vs Responsive Practices
• Global standardization advantages
– Reduced costs in development and manufacturing (e.g.
Canon Digital Camera; Sony Flat Screen TV)
– Economies of scale since fixed costs are spread over
more units of production
• Responding to national preferences
– Adjusting operating, marketing, and design to meet
specific national preferences (e.g. Coca Cola marketing
Stoney Tangawizi beer in Tanzania, Kenya where
Tangawiki means ginger in Swahili; in US the product is
sold as Stoney Gold Ginger beer).
Pattern of Internationalization
Greater reach abroad is also
characterized by greater
demand for quality service, if
needed, by global players
Global Business: Bharti Airtel
• Bharti Airtel has
outsourced all of its
business operations
except marketing,
sales and finance.
• It’s network — base
stations, microwave
links, etc.—is
maintained by
Ericsson, Nokia
Siemens Network and
Huawei
• Business support is
provided by IBM
• Transmission towers
are maintained by
Bharti Infratel Ltd.
(in India)
In March 2010, Bharti struck a US $ 9 Bn. deal to buy the Kuwait
firm Zain's mobile operations in 15 African countries
Maximizing Global Profits
• Profits are greatly
influenced by:
– International rivalry (e.g.
Airbus backed by EU and
Boeing backed by US)
– Cross-national treaties and
agreements (UN, WTO,
Trade, Transit,
environment, health etc.)
– Ethics
National Cooperation / Problems
• Treaties and agreements address a variety of commercial
advantages (transportation, trade, etc)
– To gain reciprocal advantages
– To attack problems that one country alone cannot solve
– To deal with concerns that lie outside the territory of all
countries
– Trade barrier reduction (WTO)
– Convention on Transit Trade of Land-locked States (UN)
– International arbitration on investment disputes (World Bank)
– Knowledge networks (G8, G20, IBSA, BRICS)
– Often firms actively lobby with the governments for reciprocal
market access
• Countries reluctantly cede some sovereignty / facility
because of:
– Coercion (e.g. Suez Canal, Panama Canal)
– International conflicts (e.g. following independence of Eritrea in
1991, Ethiopia lost access to Red Sea and became a land-locked
country)
The US Primary Dealers Act (1988) provides for National Treatment of foreignowned dealers of U.S. government securities, as long as U.S. firms operating in the
government debt markets of the foreign country are accorded "the same competitive
opportunities" as domestic companies operating in those markets.
Suez Canal Crisis
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1869: Suez Canal, an artificial sea-level waterway opened, work
financed by the French and Egyptian governments - operated by the
Universal Company of the Suez Maritime Canal, an Egyptian-chartered
company; the area surrounding the canal remained sovereign Egyptian
territory
Growth in trade between Asia and Europe
1875: facing debt and financial crisis, the Egypt sold its shares in the
canal operating company to British government
1882: Britain controlled Egypt, built army bases
1936: British lease of Suez canal extended for 20 years
1950s: Suez became a gateway for oil trade to Europe and America
1953: Establishment of Egyptian Republic
1956: Nationalization of the Suez Canal by Egypt, to be managed by
Suez Canal Authority (SCA)
War with Israel, defeat, introduction of UN Peacekeeping Mission
1967-75: Arab-Israel war, difference sorted after that
1.
2.
3.
Results:
Gradual weakening of UK and France as major powers
Lead to Pan-Arabism, crucial step in OPEC decision to increase oil price
during 1970s
Political Scenario in Egypt and Arab Spring