INTENATIONAL BUSINESS

MBA International Business 2014-161-*Chapter 1Globalization and International Business

MBA International Business 2014-16

MBA International Business 2014-161-*Learning ObjectivesTo define globalization and international business and show how they affect each otherTo understand why companies engage in international business and why international business growth has acceleratedTo discuss globalizations future and the major criticisms of globalizationTo become familiar with different ways in which a company can accomplish its global objectivesTo apply social science disciplines to understanding the differences between international and domestic business


MBA International Business 2014-161-*IntroductionLearning ObjectiveTo define globalization and international business and show how they affect each other


MBA International Business 2014-161-*IntroductionGlobalization is the ongoing process that deepens and broadens the relationships and interdependence among countries International business is a mechanism to bring about globalization


MBA International Business 2014-161-*IntroductionInternational business consists of all commercial transactionsincluding sales, investments, and transportationthat take place between two or more countriesincreasingly foreign countries are a source of both production and sales for domestic companies


MBA International Business 2014-161-*IntroductionIt is important to study international business becauseMost companies are either international or compete with international companiesModes of operations may differ from those used domesticallyThe best way of conducting business may differ by countryAn understanding helps you make better career decisionsAn understanding helps you decide what government policies to support


MBA International Business 2014-161-*IntroductionFactors in International Business Operations


MBA International Business 2014-161-*Forces Driving GlobalizationIncrease in and application of technologyLiberalization of cross-border trade and resource movementsDevelopment of services that support international businessGrowing consumer pressuresIncreased global competitionChanging political situationsExpanded cross-national cooperation


MBA International Business 2014-161-*Measuring GlobalizationGlobalization can be difficult to measureThe A.T. Kearney/Foreign Policy Globalization Index ranks countries byEconomic dimensionsTechnological dimensionsPersonal contactPolitical dimensionsrecently ranked Singapore and Hong Kong as most globalized


MBA International Business 2014-161-*Costs of GlobalizationLearning Objective To discuss globalizations future and the major criticisms of globalization


MBA International Business 2014-161-*Costs of GlobalizationThreats to national sovereigntylose freedom to act locallyEconomic growth and environmental stressgrowth consumes nonrenewable natural resources and increases environmental damageGrowing income inequality and personal stresspromotes global superstars at the expense of others


MBA International Business 2014-161-*Costs of GlobalizationOffshoring involves the transferring of production abroad it can be beneficial because it reduces costsbut, it also means that jobs move abroad Yet, offshoring may also create new, better jobs at home


MBA International Business 2014-161-*Why Companies Engage in IBLearning ObjectiveTo understand why companies engage in international business and why international business growth has accelerated


MBA International Business 2014-161-*Why Companies Engage in IBTo expand salespursuing international sales increases the potential market and potential profitsTo acquire resourcesmay give companies lower costs, new and better products, and additional operating knowledgeTo diversify or reduce risksinternational operations may reduce operating risk by smoothing sales and profits, preventing competitors from gaining advantage


MBA International Business 2014-161-*Why Companies Engage in IBThese three reasons sales expansionresource acquisitionrisk minimizationguide all decisions about whether, where, and how to engage in international business


MBA International Business 2014-161-*Modes of Operations in IB Learning ObjectiveTo become familiar with different ways in which a company can accomplish its global objectives


MBA International Business 2014-161-*Modes of Operations in IBMerchandise exports goods that are sent out of a countryMerchandise importsgoods that are brought into a countrySometimes referred to as visible exports and imports


MBA International Business 2014-161-*Modes of Operations in IBService exportsprovider and receiver of payment Service importsrecipient and payer of paymentExamplesTourism and transportationService performanceturnkey operations and management contractsAsset uselicensing and franchising


MBA International Business 2014-161-*Modes of Operations in IBInvestments Foreign Direct Investment (FDI)investor takes a controlling interest in a foreign companyjoint venture Portfolio Investmenta non-controlling financial interest in another entity


MBA International Business 2014-161-*Types of International OrganizationsCollaborative arrangements Joint venturesLicensing arrangementsManagement contractsMinority ownershipLong-term contractual arrangementsStrategic alliance companies that work together, but the agreement is critical to at least one partneran agreement that does not involve joint ownership


MBA International Business 2014-161-*Types of International OrganizationsMultinational enterprises (MNEs) take a global approach to markets and production or have operations in more than one countrySometimes they are referred to asmultinational corporations (MNCs)multinational companies (MNCs)transnational companies (TNCs)


MBA International Business 2014-161-*Types of International OrganizationsIn foreign markets, companies may have to adapt their typical methods of doing businessforeign conditions may dictate a particular methodoperating modes may be different from those used domestically


MBA International Business 2014-161-*Why IB is Different Learning ObjectiveTo apply social science disciplines to understanding the differences between international and domestic business


MBA International Business 2014-161-*Why IB is DifferentThe external environment affects a companys international operationsManagers must understand social science disciplines and how they affect functional business fieldsConsiderphysical factorssocial factorscompetitive factors


MBA International Business 2014-161-*Physical and Social FactorsGeographic influencesnatural conditions influence production locationsPolitical policiesdetermines where and how business occursLegal policiesinfluence how a company operates Behavioral factorsmay require changes in operations Economic forces explain differences in costs, currency values, market size


MBA International Business 2014-161-*The Competitive EnvironmentCompetitive strategy for productsCost strategyDifferentiation strategyFocus strategyCompany resources and experiencemarket leaders have more resources for international operationsCompetitors faced in each marketlocal or international


MBA International Business 2014-161-*The Competitive EnvironmentSo, a companys competitive strategy influences how and where it can best operateIts competitive situation may differ from country to country in terms of its relative strength and which competitors it faces


MBA International Business 2014-161-*Looking to the FutureLearning ObjectiveTo discuss globalizations future and the major criticisms of globalization


MBA International Business 2014-161-*Looking to the FutureThree major perspectives on the future of international business and globalizationFurther globalization is inevitableInternational business will grow primarily along regional rather than global linesForces working against further globalization and international business will slow down both trends


*Chapter 1: Globalization and International Business*The Learning Objectives for Chapter 1 areTo define globalization and international business and show how they affect each otherTo understand why companies engage in international business and why international business growth has acceleratedTo discuss globalizations future and the major criticisms of globalizationTo become familiar with different ways in which a company can accomplish its global objectivesTo apply social science disciplines to understanding the differences between international and domestic business*Learning Objective 1: To define globalization and international business and show how they affect each other.

*What is globalization? Globalization refers to the widening set of interdependent relationships among people from different parts of a world that is divided into nations.The term also refers to the integration of world economies through the reduction of barriers to the movement of trade, capital, technology, and people. Throughout history, human contacts over ever-wider geographic areas have expanded the variety of available resources, products, services, and markets. Today, so many different components, ingredients, and specialized business activities go into products that were often challenged to say exactly where they were made. For example Apples iPhones are shipped from China and seem to be Chinese, yet less than four percent of their value is actually performed in China!

*What is international business? International business consists of all commercial transactions that take place between two or more countries. International business activities allow us to get more variety, better quality, and/or lower prices. International business activities may be performed by private companies motivated by profit, or by governments that undertake them either for profit or for political reasons.

*Why should you study international business? There are many reasons. One of the most important is because global events affect companies of all sizes and in all industries. In fact, managers today need to consider where in the world to obtain the inputs they need of the required quality and at the best possible price and also where they can best sell the product or service that theyve put together from those inputs. In many cases, managers may find that they can be more competitive by engaging in global business transactions.Its also important to recognize that the best way of doing business abroad may not be the same as the best way at home. When a company operates internationally, it engage in modes of business such as exporting and importing that differ from those in which it engages domestically. In addition, physical, social, and competitive conditions differ among countries and affect the optimum ways to conduct business. So we often find that companies operating internationally have more diverse and complex operating environments than those that conduct business only at home.Even if you arent working at an international company its important to understand international business complexities because overall national conditions things like profits, employment security and wages, consumer prices, and national security are all affected by the international operations of companies and by government regulations of those operations.

*This Figure shows the complex relationships among conditions and operations that a firm may face when its conducts some of its business internationally. Well be referring back to this Figure throughout the chapter.

*You may wonder what has been driving globalization. The answer is many different factors. One factor is technology. In recent years, weve seen tremendous advances in technology. The pace of new product development is faster than ever, and many companies are finding that in order to keep up, they need to team up with companies in other countries to gain financial resources or specialized capabilities. Firms are also finding that to justify their investments in new product development, they need to expand their sales to other markets. Another factor driving globalization is the liberalization of cross-border trade. Today, most governments have reduced restrictions on cross-border trade giving their citizens access to a greater variety of goods and services at lower prices. Increased competition from foreign companies also encourages domestic producers to become more efficient. Governments hope that by opening their countries to trade, other countries will also lower trade barriers.The development of new services that facilitate international business transactions have also increased further driving globalization. In addition, todays consumers are more informed about foreign products and services and are better able to afford more luxury items. Moreover, more consumers are able to comparison shop to find better deals worldwide. Companies look for growing markets where consumer pressures are highest such as China.Intense global competition is also driving globalization. Today, companies continually look abroad to increase market share and reduce costs in order to better compete with other firms. Expansion abroad can take many forms: so-called born-global companies start out with a global focus because of their founders international experience and because advances in communications give them a good idea of where global markets and suppliers are. Related to this, many new companies locate in areas where there are many competitors and suppliersa situation known as clusteringwhich helps them to become quickly aware of foreign opportunities.Finally, changing political situations and increased cross-national cooperation have allowed international business to flourish. Countries of different political systems are more open than before to conducting international trade with each other. Governments are spending more resources on the improvement of infrastructure facilitating the transport of goods and resources. Furthermore, governments have realized the benefits of international cooperation. In particular, governments engage in international cooperation in order to gain reciprocal advantages, to attack problems jointly that one country acting alone cannot solve, and to deal with areas of concern that lie outside the territory of any nation. *How can we measure globalization? Well, its not easy. In general, we know that globalization has been increasing at least since the mid-1900s. Indeed, at the moment, more than 20 percent of world production is sold outside of its country of origin as compared to just seven percent in 1950. However, much of the world is still relatively isolated. One of the most comprehensive efforts to explore levels of globalization is the A.T. Kearney/Foreign Policy Index which ranks countries across four dimensions: economic, technological, personal contact, and political dimensions. Interestingly, the Index shows that a country can rank quite high on one dimension, but much lower on another. For example, the United States ranks high on the technological dimension, but much lower on the economic dimension. In contrast, Singapore and Hong Kong have ranked as the most globalized across all dimensions, while India and Iran are at the bottom of the list.

*Learning Objective 3: To discuss globalizations future and the major criticisms of globalization.*While there are many benefits to globalization, it remains controversial. Antiglobalization protests have become common at international conferences, and the reaction to government policies is sometimes violent. Three issues are of particular concern. First, the threat the globalization poses to national sovereignty. According to critics, globalization undermines the ability of a country to act in its own best interests and can make smaller economies overly dependent on larger ones. Moreover, critics contend that even a countrys cultural sovereignty is threatened as products, companies, work methods, social structures and language are homogenized as a result of globalization.A second concern is the effect of globalization on economic growth and the environment. Because globalization brings growth, more nonrenewable natural resources are consumed and damage to the environment increases. You might think of despoliation through toxic and pesticide runoffs into rivers and oceans, air pollution from factory and vehicle emissions, and deforestation that can affect weather and climate for example. However, others argue that global cooperation actually fosters superior and uniform standards for combating environmental problems, and that companies are encouraged to seek resource-saving and environmentally friendly technologies. Finally, critics are concerned about the effect of globalization on income equality and personal stress. According to critics the income inequality that is present in many countries today is a result of the global superstar system that has emerged as a consequence of globalization. Critics contend that globalization has facilitated access to a greater supply of low-skilled and low-cost labor and encouraged competition that leads to winners and losers. There is also some evidence that the growth in globalization goes hand in hand not only with increased insecurity about job and social status, but also with costly social unrest.

*Critics of globalization also worry that the practice of offshoring is shifting too many jobs abroad. But keep in mind, that the practice allows companies to keep costs down, and can actually help create high value jobs at home. IBMs offshoring strategy for example, allows the company to not only save money and boost sales, but also to create new jobs. *Learning Objective 2: To understand why companies engage in international business and why international business growth has accelerated.*Why should companies engage in international business? A general answer is that going in international can help firms create value. More specifically, going global can help firms expand sales, acquire resources, and diversify or even reduce risks. *All three of these can influence decisions about whether, where, and how to go global. *Learning Objective 4: To become familiar with different ways in which a company can accomplish its global objectives.*The most popular modes of international business are merchandise exports and merchandise imports. They represent major sources of international revenues and expenditures for countries.*Services exports and imports are the fastest growing sector in international trade. The most important are tourism and transportation, service performance, and asset use. Many countries depend on tourism and transportation for both foreign exchange earnings and employment. Companies pay fees for services rendered in turnkey operations and management contracts. Turnkey operations are construction projects performed under contract and transferred to owners when theyre operational. Management contracts are arrangements in which one company provides personnel to perform general or specialized management functions for another. Asset use involves allowing another company to use your trademarks, patents, copyrights, or expertise in exchange for royalties. This takes place through licensing and franchising agreements. *Companies can also engage in international business by taking either a controlling or a non-controlling interest in a foreign company. When a firm takes a controlling interest the investment is known as foreign direct investment. If two or more companies share ownership of the investment its referred to as a joint venture. A non-controlling interest is called portfolio investment. *We use different terms to refer to the various collaborative arrangements between companies including joint ventures, licensing arrangements, management contracts, and long-term contractual arrangements. Those relationships in which the agreement is of critical importance to one or more partners or to an agreement that doesnt involve joint ownership are called strategic alliances. *Any company with foreign direct investments is known as a multinational enterprise. Other terms used for these types of companies include multinational company, multinational corporation, or transnational corporation. *Keep in mind that companies doing international business may have to adjust their typical methods of operation depending on the conditions in foreign markets or if the operating modes are different from those used domestically. *Learning Objective 5: To apply social science disciplines to understanding the differences between international and domestic business.*Companies involved in international business need to explore how the external environment will affect their operations. In particular, its important for managers to understand the social science disciplines and how they affect all functional business fields. *We can organize physical and social factors into four groups. The first is geographic influences or how natural conditions influence the choice of production locations. The second group is political policies which impacts how, and even if, business takes place within a country. Related to this are legal policies. Firms must follow the laws in each country. The fourth group, behavioral factors, may also force a company to alter its operations to better fit with local cultural norms and values. Finally, economic forces affect costs, currency values, market size, and so on. Together, these factors influence how companies produce and market their products, how they staff their operations, and so on. Keep in mind that the factors may require a company to use a different method of operation internationally than is used domestically. *Managers also need to understand how the competitive environment will affect their operations. A companys competitive strategy - low cost, differentiation, or focus - will influence its international strategy, as will its resources and experience. Companies with greater resources and experience will have more opportunities open to them than companies with more limited resources or experience. Finally, the competitors a firm faces in each market will dictate to some degree a companys international strategy. *In summary, a firms competitive strategy influences how and where it operates. Firms might find that their competitive situation differs from market to market. *Learning Objective 3: To discuss globalizations future and the major criticisms of globalization.*What is the future of international business and globalization? Well, there are three different perspectives on what the future might hold. Some believe that future globalization is inevitable. Those taking this perspective note that advances in transportation and communications are so pervasive that consumers everywhere will demand the best products for the best prices regardless of their origins. Moreover because MNEs have so many international production and distribution networks in place, theyll pressure their governments to place fewer rather than more restrictions on the international movement of goods and the means of producing them. The largest challenge to overcome in this scenario will be figuring out how to spread the benefits of globalization equitably while minimizing the hardships placed on individuals and companies affected by increased international competition.Others however, think that in the future international business will grow more along regional rather than along global lines. This argument is based on studies that indicate that companies tend to conduct international business in neighboring countries. Its logical that when companies first engage in international business, they expand into neighboring countries first and continue outwardly from there. This helps reduce transportation costs and companies can benefit from regional trade agreements that reduce barriers. Still others feel that the pace of both globalization and international business will slow down. Recall that antiglobalization sentiments have surfaced over the years, protesting against some of the negative effects of international business activity. This sentiment together with economic recession, growing political instability, and rising fuel costs among other things, threatens to slow international business growth.

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