International Business: Strategy, Management, and the New Realities

Chapter 1

Introduction to

International Business


Strategy Management & the New Realities by

Cavusgil, Knight and Riesenberger

International Business: Strategy, Management, and the New Realities

The Framework

#5 – Functional Area excellence

#4 – Entering & operating in international markets

#3 – Strategy & opportunity assessment

#2 – The environment of international business

#1 – The Foundation concepts of international business


Performance of trade and investment activities by firms across national borders.


The Internationalization of Business

• Companies conduct value-adding activities on a global scale, primarily to organize, source, manufacture, and market

• A “level playing field” has made international activities appealing to all types of firms- large and small; manufacturing and service sectors

(e.g. banking, transportation, engineering and design, advertising, and retailing).


The Nature of International Business

• All value-adding activities including sourcing, manufacturing, and marketing, can be performed in international locations

• The subject of cross-border trade can be products, services, capital, technology, know-how, and labor


Globalization of Markets

Ongoing economic integration and growing interdependency of countries worldwide.

• Integration is central to globalization, which has resulted in the widespread diffusion of products, technology, and knowledge worldwide, regardless of where they originate.


Dimensions of Market Globalization

• Greater integration and interdependency of national economies; leading to freer movement of goods, services, capital, and knowledge

• Rise of regional economic integration blocs

• Growth of global investment and financial flows

• Convergence of consumer lifestyles and preferences

• Globalization of production


Key concepts in International Trade

& Investment

Exchange of products and services across national borders; typically through exporting and importing.

• Firms internationalize via exporting, importing, foreign direct investment, licensing, franchising, and collaborative ventures


Exporting

Sale of products or services to customers located abroad, from a base in the home country or a third country.


Importing

or

Global Sourcing

Procurement of products or services from suppliers located abroad for consumption in the home country or a third country.


International investment

Transfer of assets to another country or the acquisition of assets in that country.

• International Portfolio investment (typically shortterm): Passive ownership of foreign securities such as stocks and bonds, to generate financial returns.

• Foreign direct investment (FDI) (typically longterm): An internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant, and equipment.


World Trade Is Growing Faster than GDP

Rapid integration of world economies is fueled by factors such as the decline of trade barriers, e.g. tariffs, liberalization of markets, privatization and the economic vitality of emerging markets.


Comparing the Growth Rates of World GDP and World Exports

Leading Countries in International

Merchandise Trade, Total Value


Merchandise Trade, as % of Nation’s GDP

The Nature of FDI

• Foreign Direct Investment (FDI) - (asset ownership and long time frame)

– The ultimate commitment-level of internationalization

– We focus primarily on FDI, as opposed to

International Portfolio investment.

• Large, resourceful companies with substantial international operations leverage FDI to:

– Manufacture/assemble products in low-cost countries, e.g., China, Mexico, E. Europe


Dramatic Growth of FDI Since the 1980s

• September 11, 2001 interrupted FDI inflows, the longer term trend continues

• Developed economies = Australia, Canada,

Japan, the United States, and most countries in

Western Europe.

• Developing economies = Parts of Africa, Asia,

Latin America, and the Middle East. Of particular significance is the growth of FDI into developing economies despite widespread poverty and less investment capital than advanced economies.

• The improved lives of billions are directly linked to world trade and investment.


Foreign Direct Investment (FDI) Inflows into World

Regions (in Billions of U.S. Dollars per Year)


Services Trade, Total Value


Services Trade , as % of Nation’s GDP

International Financial Services Sector

• Banking and financial services are the most active international services.

• Explosive growth of global capital markets is due to:

– Deregulation of world capital markets

– Falling investment barriers

– Banks/financial institutions are internationalizing in pursuit of high returns to many previously untargeted countries

– Money is flowing internationally into portfolio investments and pension funds

• Leading players include Citibank, Deutsche Bank,

BNP Paribas, and HSBC


Service Industry Sectors That Are

Rapidly Internationalizing

The Four Risks of International Business

The Four Types of Risks in IB

• Cross-cultural risk: a situation or event where a cultural miscommunication puts some human value at stake

• Country risk : potentially adverse effects on company operations and profitability holes by developments in the political, legal, and economic environment in a foreign country

• Currency risk: risk of adverse unexpected fluctuations in exchange rates

• Commercial risk: firms potential loss or failure from poorly developed or executed business strategies, tactics, or procedures


Risks: Always Present but Manageable

• Managers need to understand their implications, anticipate them, and take proactive action to reduce adverse effects.

• Some risks are extremely challenging, e.g., the East Asian economic crisis of

1998 generated substantial commercial, currency, and country risks. Political and social unrest surged to Indonesia,

Malaysia, South Korea, Thailand, and the

Philippines.


Participants in International Business

• Multinational enterprise (MNE): A large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries.

• In addition to a home office, an MNE owns a worldwide network of subsidiaries.

• Examples - Caterpillar, Kodak, Nokia, Samsung,

Unilever, Citibank, Vodafone, DHL

• Examples of Fortune’s Global 500- Exxon Mobil,

Royal Dutch Shell, BP, General Motors,

DaimlerChrysler, Toyota, Ford, and Wal-Mart.


Geographic Locations of Multinational Enterprises

Small and Medium-Sized Enterprise

A company defined (in the U.S.) as having 500 or fewer employees

• Comprise 90 - 95 % of all firms in most countries.

• Increasingly more SMEs participate in international business

• Account for 1/3 of exports from Asia; 1/4 of the exports from the affluent countries in Europe and

North America

• Contribute more than 50 percent of total national exports in Italy, South Korea, and China.


The Born Global Firm

Born global firm: a young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets.

‘Born Globals’ and SMEs:

• Are often more innovative, adaptable, and have quicker response times;

• Are better able to serve niche markets;

• Leverage the Internet to do international business;

• Tend to minimize fixed costs and outsource, due to limited resources;

• Tend to flourish on private knowledge that they cultivate via their knowledge networks.


Why do Firms Internationalize?

1. Seek opportunities for growth through market diversification

2. Earn higher margins and profits

3. Gain new ideas about products, services, and business methods

4.

Better serve customers that have relocated abroad

5. Be closer to supply sources , benefit from global sourcing advantages, or gain flexibility in the sourcing of products


Why do Firms Internationalize? (cont’d)

6.

Gain access to lower-cost or better-value factors of production

7.

Develop economies of scale in sourcing, production, marketing, and R&D

8.

Confront international competitors more effectively or prevent the growth of competition in the home market

9. Invest in a potentially rewarding relationships with foreign partners

31

Why Study International Business?

• A facilitator of the global economy and interconnectedness

• A contributor to national economic wellbeing

• A competitive advantage for the firm

• An activity with societal implications

• A source of competitive advantage for you


Contributor to National Economic Well-Being

• International trade is a critical engine for job creation. It is estimated that every $1 billion increase in exports creates more than 20,000 new jobs.

• One of every seven dollars of U.S. sales is made abroad.

• International business is both a cause and a result of increasing national prosperity.

• Prosperity is accompanied by literacy rate gains, nutrition and health care improvements, with some tendencies towards freedom and democracy.


A Competitive Advantage for the Firm

• Increase sales

• Maximize returns : Foreign markets often generate returns far superior to those in domestic markets.

• Global scale economies : International players can maximize their efficiencies by securing cost-effective factor inputs from around the world.

• Resource acquisition : Access to otherwise unavailable critical resources


An Activity with Societal Implications

• As firms increase their international activities, so does responsibility to society to be a good corporate citizen.

• Large corporations like Wal-Mart, Unilever, and Sony have annual revenues larger than the GDPs of many of the nations they operate.

• The internationalization of thousands of firms negatively impacts the natural environment, e.g. pollution (Royal Dutch Shell’s refining operations in Nigeria).

• Large banks and international investment brokers have disrupted the economies of nations with aggressive currency trading or by manipulating stock markets.

• Some MNEs ignore human rights and basic labor standards by establishing factories in countries that pay low wages with substandard working conditions, e.g. Nike in Asia.

• Building factories abroad often leads to job losses at home.


A Competitive Advantage for You

• Julie, the student in the opening vignette is touched everyday by a variety of global business transactions.

• She is considering a career in international business because she is grasping its importance and growing role in the world.

• Working across national cultures exposes managers to a diversity of experiences, new knowledge, novel ways of seeing the world, and unusual challenges.

• Internationally-experienced managers are typically more self-confident, cosmopolitan, and have positioned themselves for unique professional opportunities.


Chapter 2

Globalization of Markets and the

Internationalization of the Firm


Globalization of Markets: A Macro Concept

• Two mega trends have altered the international business landscape: globalization and technological advances .

• Market globalization refers to the interconnectedness of national economies and growing interdependence of buyers, producers, suppliers, and governments in different countries.

• Globalization allows firms to view the world as one large marketplace for goods, services, capital, labor, and knowledge.


The World Competitiveness Scoreboard 2007

(2006 rankings are in brackets)

Blah

Source: IMD World Competitiveness Yearbook 2007

Global Competitiveness Index 2006-2007


Relationship Between Globalization and Growth in

Per Capita Gross Domestic Product, 1990s

Phases of Globalization

1 st Phase: 1830, peaking around 1880

Aided by railroads, ocean transport; resulting in the rise of mass production and growing trade

2 nd Phase: 1900, peaking late 1920s

Fueled by electricity and emergent modern technologies; early

MNEs

3 rd Phase: 1948, peaking around 1970

End of WW II; Marshall Plan; Gradual reduction of trade barriers, especially under General Agreement on Tariffs and Trade (GATT)

4 th Phase: 1980, peaking around 1997

Fueled by information and communications technologies. Rapid liberalization in Emerging Markets

The Death of Distance


The Drivers and Consequences of Market

Globalization

Firms are required to Internationalize

• Firms implement internationalization

proactively

are more successful than those

reactively

engaging.

• E.g., Vodafone has established production and marketing operations all around the world. Has some 200 million customers in 30 countries.


Technological Advances as a

Driver of Market Globalization

• Advances in technology provide the means for internationalization of firms

• Advances in technology:

– Reduces cost of doing international business;

– Enables even small firms to go international

– Helps coordinate worldwide activities;

– Mitigates geographic distance


Information Technology

• Cost of computer processing fell by 30% per year since late 1980s, and continues to fall.

• Increases productivity across the firm

• Impact of IT on our daily lives has been profound

– laptops, smart phones, Internet, Google, etc.


Declining Cost of Global Communication and

Growing Number of Internet Users

Communications Technology

• Especially important. Includes telecommunications, satellites, optical fiber, wireless technology, and the Internet.

• The Internet, and Internet-dependent systems such as intranets, extranets, and e-mail, connect millions of people across the globe.

• The Internet opens up the global marketplace to all firms, large and small


Manufacturing and Transportation Technologies

• Revolutionary developments now permit manufacturing that is both low-scale and low cost, with the support of computer-aided-design of products (CAD), robotics, and production lines managed and monitored by microprocessor-based controls.

• In the 1960s, technological advances have led to the development of fuel-efficient jumbo jets, giant ocean-going freighters, and containerized shipping.

• Thus, the cost of transportation has declined substantially, spurring rapid growth in international trade.


Societal Consequences of Market Globalization

• Positive consequences

– More jobs

– Economic development and growing prosperity

– Technology and knowledge transfer

• Negative consequences

– Natural environment

– Disruptive effects in national economies

– Human rights violations abroad (e.g., sweatshops)

– Job losses at home


Economic Freedom Enhances Income Growth

• In the long run, globalization generally leads to:

– higher living standards

– more efficient resource usage

– greater access to technology, products, and services

• In particular, liberalization of markets appears to enhance income levels


Unintended Consequences of Market

Globalization

• Loss of national sovereignty

– Power shifts to MNEs and larger countries

• Offshoring and the flight of jobs

– Dislocation of jobs

• Effect on the poor

– Benefits of globalization are not evenly distributed

• Effect on the natural environment

• Effect on national culture

– Loss of national cultural values and identity


Corporate Social Responsibility

• Over time, governments pass legislation that promotes improved environmental conditions.

• In addition, many firms now consider the societal consequences of their actions --

Corporate Social Responsibilty (CSR)

• Examples: Benetton in Italy (clothing), Alcan in Canada (aluminum), and Starbucks have attempted to embrace practices that protect the environment, often at the expense of profits.


Firm Level Consequences of Market

Globalization

• Countless new business opportunities for internationalizing firms

• New risks and intense rivalry from foreign competitors

• More demanding buyers who source from suppliers worldwide

• Greater emphasis on proactive internationalization

• Internationalization of firm’s value chain


Examples of How Firms’ Value

Chain Activities Can Be Internationalized

Value Chain : Sequence of value adding activities performed in the course of developing, producing, marketing, and servicing a product.

Implications for Management

• Global orchestration’ of value-chain activities (e.g., in order to cut costs, access resources, target new markets)

• Exploit knowledge acquired worldwide

• Increase productivity

• Collaborate with foreign partners


Implications for Managers: Acquiring Global

Competence is a Requirement

• Open-mindedness

• Tolerance for ambiguity

• Perceptiveness

• Premium on personal relationships

• Flexibility, adaptability, and self-reliance

• Good sense of humor

• Warmth in human relationships

• A curious mind


Chapter 3

Participants in


International Business: Strategy, Management, and the New Realities 62

Three Types of Participants in IB

1. The focal firm – initiator of IB transaction, including MNEs and SMEs

2. Distribution channel intermediary – specialist firm providing logistics and marketing services in the international supply chain

3. Facilitator – a firm providing special expertise in legal advice, banking, customs clearance, market research, and similar areas




Example from the Textbook: Dell Computers

• Dell makes various products, each with its own value chain. The total supply chain for a notebook computer, including multiple tiers of suppliers, involves about 400 companies, primarily in

Asia, but also in Europe and the Americas.

• On a typical day, Dell processes orders for 150,000 computers, which are distributed to customers around the world, with non-

U.S. sales accounting for 40%.

• Shipping is handled via air transport, e.g. from the Dell Malaysia factory to the U.S. Dell charters a China Airlines 747 that flies to

Nashville, Tennessee six days a week, with each jet carries

25,000 Dell notebooks that weigh a total of 110,000 kilograms, or

242,500 pounds.

• One of the hallmarks of Dell’s value chain is collaboration . CEO

Michael Dell and his team constantly work with their suppliers to improve Dell’s value chain.


The MNE as a Focal Firm

• A Multinational Enterprise (MNE) is a large organization with a network of production plants, regional headquarters, and country subsidiaries in numerous countries.

• Examples include: Nestlé, Sony, Unilever,

Nokia, Ford, Citibank, ABB, and Shell Oil.

• Some MNEs in countries like China and

Russia may be state owned.



The SME as a Focal Firm

• A Small and Medium-Sized Enterprise (SME) is a relatively small player in its respective industry

(in the U.S., those with 500 employees or less).

•

SMEs can be more flexible and quicker to respond to international opportunities.

• As limited resources often prevent them from engaging in FDI, SMEs internationalize via exporting, joint ventures, and contractual arrangements


The Born Global as a Focal Firm

• A relatively new breed of the SME that undertakes early and substantial internationalization.

•

Primarily a niche player

• Displays high degree of entrepreneurial orientation, proactiveness, and customer service.

• Now make up the fastest growing segment of exporters in most countries.


Evolution of a Born Global Exporter and Challenges It Overcomes

Size

Some will exceed

$100 million

Small domestic sales only

Product or process development

Begin exporting early (2 years)

Manage transition issues early

Create international position

Niche limits

Time 





Credibility

Finance

Export

 Finance

 Foreign representation

 Export know-how & skills

 Market information

 Innovation… the next product


Common Characteristics of Born Global Firms

 Early, rapid, and substantial internationalization

 Fewer financial and other resources than traditional MNEs

 Often formed by strong entrepreneurs

 Often technically superior in a given product category

 Internationalize via exporting

 Heavy use of information and communications technologies


Foreign Market Entry Strategies of Focal Firms

Cross-border business transactions can be grouped into three categories:

1. Trade : buying and selling of products (mainly exporting and importing)

2. Contractual exchange of services or intangibles (mainly licensing and franchising)

3. Equity ownership in foreign operations : establishing foreign presence through direct investment (FDI)


Examples of Contractual Strategies

Licensor : Focal firm grants the right to the foreign partner to use certain intellectual property in exchange for royalties.

• Anheuser-Busch signed a licensing agreement with Japanese beer brewer Kirin in which Kirin produces and distributes Budweiser in Japan.

• Mega Bloks (Canadian toymaker) signed an agreement with Disney that gives the SME the right to manufacture toys that feature Disney characters like Winnie the Pooh, Power Rangers.


Examples of Contractual Strategies (cont’d)

Franchisor

: Focal firm grants the right to the foreign partner to use an entire business system in exchange for fees and royalties.

• For firms like Subway or KFC, it’s an efficient way to internationalize,

• In China, Subway is the third-largest

U.S. fast-food chain.



Examples of Contractual Strategies (cont’d)

Turnkey Contractor : Provide engineering, design, and architectural services in the construction of airports, hospitals, oil refineries, and other types of infrastructure. E.g., European Channel Tunnel, Three

Gorges Dam in China, Delhi Metro Rail Ltd.

Build-own-transfer venture- an increasingly popular type of turnkey contract in the developing economies where contractors acquire an ownership in the facility for a period of time until it is turned over to the client.



International Collaborative Venture (ICV)

• Arrangement in which partners pool their resources and share the cost and risks of the new venture.

• Through an ICV, a focal firm can exploit partner’s complementary technologies and expertise, avoid trade barriers, connect with customers abroad, and configure value chains more effectively.

• A middle ground strategy between exporting and FDI


Two Types of International Collaborative Ventures

• Joint Venture : One firm creates and jointly owns a new legal entity together with another firm. Advantages: share costs and risks; gain access to needed resources; gain economies of scale; pursue long-term strategic goals.

• Project-Based Collaborative Venture : Firm collaborates with foreign partners on a project with a relatively narrow scope and a welldefined timetable, without creating a new legal entity. Often used to share the cost and risks of knowledge-intensive R&D projects.


Example from the Textbook:

Project-Based Collaboration

Cisco Systems has expanded much of its operations through strategic alliances with key foreign players.

• With Japan’s Fujitsu to jointly develop routers and switches that enable clients to build Internet protocol networks for advanced telecommunications.

• In Italy, Cisco teamed with the telecom company

Italtel to jointly develop network solutions for the convergence of voice, data, and video to meet growing global demands.


Distribution Channel Intermediary

• Specialize in physical distribution and marketing service; connect the focal firm with the end user in the foreign market.

• Assist the focal firm by providing logistics services such as warehousing and customer support.

• Especially critical to exporters

• Based either in the home country or the foreign market.


Intermediaries Based in the Foreign Market

• Distributor : Takes title to the exporter’s goods and performs marketing functions such as sales, promotion, and after sales service.

• Serves as an extension of the firm in the foreign market, performing many downstream marketing functions


Agent and Manufacturer’s Representative

•

Agent

: (also known as a ‘broker’): Does not take title to the goods. Works on a commission basis.

•

Manufacturer’s Representative

:

Works under contract to the exporter to represent and sell its goods. Acts as a contracted salesperson in a designated territory.


Retailer

• Stores that mainly serve regular consumers.

• Some, large firms sell directly to retailers, bypassing distributors (wholesalers)

• Retailers provide direct access to retail customers

• Examples: Carrefour, IKEA, Royal Ahold,

Seibu, Toys “R” Us, Wal-Mart, and Zara.


Top Retailers based on Percent of Sales Outside of Home Country

Retailer Base

IKEA

Delhaize "Le Lion"

Royal Ahold

OttoVersand Gmbh & Co

Pinault-Printemps-Red

Tengelmann Warenhande

IGA

Kingfisher plc

MetroAG

Carrefour Group

Sweden

Belgium

Netherlands

Germany

France

Germany

USA

UK

Germany

France


Percent of Sales in Foreign

Countries

99.90

83.00

76.40

52.00

48.10

47.90

44.90

41.00

40.00

37.70

86

Trading Company

• Based in the home country, a trading company is an intermediary that engages in imports and exports of a variety of products.

• Large trading companies such as Cargill are high-volume, low-margin resellers.

• Many trading companies deal primarily in commodities such as grains, minerals, coal, and metals.


The Japanese Sogo Shosha

• Large trading companies in Japan are known as the

sogo shosha

. Each has an extensive network of foreign offices and buyers including governments.

• Examples include Mitsubishi, Mitsui,

Marubeni, and Sumitomo

• The

sogo shosha

historically handled about half of Japanese external trade.



The Role of Trading Companies in IB

• Trading companies work with remarkably low margins; they tend to be high-volume, lowmargin resellers.

• Five of the 10 largest trading companies are based in Japan. Trading companies have historically played a very important role in

Japan’s external trade.

• Being an island economy and lacking most raw materials needed for industrialization,

Japan had to import them.

• Trading companies are also more common in

South Korea, India, and Europe.


Export Management Company (EMC)

• Acts as an export agent on behalf of the focal firm. Based in home country.

• An EMC finds export customers, negotiates terms of sale, and arranges for international shipping, typically for smaller exporters.

• Most specialize in specific industries and geographic areas.


Online Intermediaries

• Examples include Amazon, Dell, eBay, and

Alibaba – English-language portal based in

China that specializes in business-tobusiness exchanges.

• Traditional retailers such as Wal-Mart and

Tesco have also set up online presence.

• One negative aspect is the ease with which unscrupulous marketers prey on unsuspecting customers with fake products

(e.g., fake pharmaceuticals).


Facilitators in IB

• Facilitators assist the focal firm with specialized services required in crossborder transactions.

• Facilitators include: Banks, international trade lawyers, freight forwarders, customs brokers, consultants, ad agencies, and market researchers.


Examples of Other Facilitators

•

International trade lawyers

• International business

consultants

•

Tax accountants

•

Market research firms


International Business: Strategy, Management, and the New Realities

Introduction to

International Business

The Framework

Globalization of Markets

Key concepts in International Trade

& Investment

Exporting

Importing

Global Sourcing

International investment

The Nature of FDI

Small and Medium-Sized Enterprise

Globalization of Markets and the

Internationalization of the Firm

proactively

reactively

Information Technology

Implications for Management

Participants in

International Business

The MNE as a Focal Firm

The SME as a Focal Firm

The Born Global as a Focal Firm

Franchisor

Distribution Channel Intermediary

Agent

Manufacturer’s Representative

Retailer

Trading Company

The Japanese Sogo Shosha

sogo shosha

sogo shosha

Export Management Company (EMC)

Online Intermediaries

Facilitators in IB

Examples of Other Facilitators

International trade lawyers

consultants

Tax accountants

Market research firms

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