University of Cagliari, Faculty of Economics, 2011-12

Business Strategy and Policy

A course within the II level degree in Managerial Economics

year II, semester I, 9 credits

Lecturer:Dr Alberto Asqueraasquer@unica.it

Phone: 070 6753399

Introduction

1. Internationalisation

2. Where do firms go international? The 'global shift'

3. How do firms go international? Modes of entry in foreign markets

4. What issues do international firms face?

5. Supporting internationalisation: the Chambers of Commerce Abroad

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6. Summary

1. Internationalisation

Internationalisation is the process through which a firm expands its business outside the national (domestic) market

Firms go international:

to enter new output markets

to reduce costs and enhance competitiveness

to exploit their own core competences in new markets

to share risks over a larger market

to take advantage of lower labour cost, lower taxation, cheaper natural resources

(sometimes, because the domestic market is just too small for company growth)

1. Internationalisation

Firms generally go international by exporting their products first, then by establishing sale representatives in the foreign countries, and then possibly setting up production facilities

Eventually, international firms may develop into:

Multinational corporations (MNC): a firm that carries out its value chains in more than one country. It is generally headquartered in one home country while it also operates in one or more host countries.

Trans-national corporations (TNC): a MNC that does not identify itself with any specific nation, but acquires truly international (i.e., not country-dependent) features and high local responsiveness

British East India Company, est. 1600

Royal DutchShell, est. 1907

Siemens, Berlin,est. 1847

1. Internationalisation

Example: Cobra beer

1989

Est. Fulham, London

First brewed in Bangalore, India,

by Mysore Breweries

Exported to the UK

1990

Licensed and brewed in the UK by

Wells & Young's

1997

Subsidiaries

Exported to about 45 countries

2009

Majority of the firm acquired by a

US-Canada brewer

2. Where do firms go international? The 'global shift'

Theories about international trade and localisation:

Absolute cost advantage (Smith, 1776)

Comparative cost advantage (Ricardo, 1817)

Size of economic activity and distance ('gravity model of trade')

Market imperfections to exploit (e.g., proprietary technology, exclusive control of inputs, scale economies, control of distribution channels, etc.)

Higher returns to scale and network effects that (possibly in conjunction with favourable government policies) shield industries from international competition ( 'new trade theory')

2. Where do firms go international? The 'global shift'

2. Where do firms go international? The 'global shift'

2. Where do firms go international? The 'global shift'

3. How do firms go international?

Entry strategies into foreign markets include:

Merely exporting a firm's products into a foreign market, possibly with the support of trade brokers

Licensing a firm's production and marketing process, or asking for royalties to be paid for the use of firm's assets and resources

Franchising a firm's business

Directly undertaking production and selling in a foreign country a) through a 'multinational approach' by adapting to local markets b) through a 'global approach' by mass-marketing the same product

Strategic alliances and joint ventures with foreign firms

3. How do firms go international?

Entry strategies into foreign markets include:

Merely exporting

Licensing or asking for royalties

Franchising a firm's business

'Multinational approach'

'Global approach'

Strategic alliances and joint ventures

4. What issues do international firms face?

Internationalisation strategy brings about some issues, for example:

Managing cultural differences

Facing risk of exchange rate fluctuation (e.g., €/US$)

Coping with unwelcoming host government policies

5. Supporting internationalisation: the Chambers of Commerce Abroad

The CCA are business associations that are established as private sector organisations, are based on the principle of freedom of association, and operate for the interests of their members without any obligation to assist the government (i.e., CCA are akin to so-called 'Anglo-Saxon model' rather than 'Continental model' CC).

They generally originate from the spontaneous gathering of businessmen and/or business company executives based in the same local area within foreign countries, that later apply for recognition of CCA status from home country public authorities or home national association of CC.

The CCA play a silent albeit substantive role in trying to shape institutions and regulations of foreign markets (e.g., Amcham Belgium; Cowles, 1996, 2001, and Peterson and Cowles, 1998), although they have not been largely researched so far.

The CCA perform various activities generally intended to establish favourable conditions for their members (business companies), including (Saner et al., 2000)

influencing economic and social actors for creating and seizing new business opportunities,

working with rule-making organisations that affect international trade and foreign investments,

preventing potential conflicts with stakeholders and minimising political risk,

and actively engaging the media and other public arenas for safeguarding image and reputation of their members.

The meaning of what they do – sometimes labelled 'business diplomacy' – can be better defined by drawing some conceptual boundaries between their activities and those of other related concepts (Lakoff, 1987).

5. What Chambers of Commerce Abroad do

Field of activity

Organisational venues

Desired performance

Objectives of the activity

Mode of operation

Role of actor(s)

Diplomacy(Lee and Hudson, 2004; Satow, 1917; Saner et al., 2000)

Inter-governmental The pursue of peaceful means for conducting business between states

To build and sustain positive and constructive relations between states

Advising, organising, negotiating, information gathering and analysis, rules compliance, ambiguity handling

Facilitators

Economic/commercial diplomacy(Rana, 2002; Lloyd, 2003; Coolsaet, 2004; Yeung, 2004)

Inter-governmental or business- government

The pursue of economic gains and advantages for countries

To promote exports, attract inward foreign investments, and stimulate other economic activities

Advising, networking, negotiating, gathering information and analysing it, and conflict handling

Professional 'salesmanship'

Business diplomacy(Saner et al., 2000)

Inter-governmental or business- government

The pursue of economic gains and advantages for business companies

To establish favourable conditions for business companies' activities

Creating and seizing business opportunities, safeguarding image and reputation of business companies, affecting rule-making, conflict prevention

Entrepreneurial broker

Public relations(Hutton, 1999; Bernays, 1955; Harlow, 1977)

Inter-organisational or personal

The pursue of the interests of the organisation or of the public

To actively reap opportunities or react to threats

Communicating, cooperating, issue management, gathering information,defining responsibilities, embrace change, anticipate trends.

Strategic relationship managers

5. Business diplomacy

Let us look at CCA established by four main EU countries:

Germany (Die Deutschen Auslandshandelskammern, AHK) about 40,000 companies associated in 80 countries

France (Union des Chambres de Commerce et d'Industrie Francaises a l'Etranger, UCCIFE) about 25,000 companies associated in 78 countries

Italy (Assocamereestero) about 24,000 companies associated in 49 countries

The UK (British Chambers of Commerce Abroad) in over 90 countries

in 15 Asian countries (Bangladesh, Cambodia, China, India, Indonesia, Japan, South Korea, Laos, Malaysia, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam)

5. Some EU Chambers of Commerce Abroad in Asia

Country of origin

Host Germany France The UK Italy Total

Bangladesh X X 2

Cambodia X (BBA) 1

China X X X X 4

Hong Kong X X X X 4

India X X (UK-India BC) X 3

Indonesia X X X 3

Japan X X X X 4

South Korea X X X X 4

Laos (BBG)

Malaysia X X X 3

Philippines X X X 3

Singapore X X X X 4

Sri Lanka X (SL-Italy BC) 1

Taiwan X X X 3

Thailand X X X X 4

Vietnam X X X X 4

Total 11 14 13 9 47

5. Some EU Chambers of Commerce Abroad in Asia

Country of origin

Host Germany France The UK Italy

Bangladesh 1996 1991

Cambodia 1998

China 1981 1992 1980s (1950s) 1991

Hong Kong N.A. 1986 N.A. 1997 (1993)

India N.A. 1977 N.A.

Indonesia 1970 (1924) 1979 1990s

Japan N.A. 1918 1950s 1972

South Korea 1981 1986 1977 2000s

Laos

Malaysia N.A. 1991 1964

Philippines N.A. 1919 1997 2011

Singapore 2004 1979 1998 (1974) N.A.

Sri Lanka N.A.

Taiwan 1981 1991 N.A.

Thailand N.A. 1960s 1946 1978

Vietnam N.A. 1989 1990s 1996

5. Some EU Chambers of Commerce Abroad in Asia

Common membership services (access to members directory, subscription to newsletters and bulletin, access to sectoral industry publications and country reports, participation to social events, workshops, and seminars, attendance to language courses, benefits from CCA's media presence, and access to job seekers databases)

'On demand' services for members(provision of information on specific companies or markets, the search and screening of potential suppliers and business partners, the organisation of and assistance for business meetings and trade missions, the organisation of and assistance for participating to trade fairs and exhibitions, the legal assistance for the establishment of businesses, business domiciliation and secretary services, legal assistance and advice, translation and interpreter services, advertisement and sponsorships, and employment services)

Consultative and policy advocacy functions(members' committees focused on various thematic areas such as corporate social responsibility, industrial relations, education, young professionals, government relations, policy and consultation, sustainable development, taxation and regulation; they also serve to share information and updates on legislation, policy initiatives, government officers' political orientations, and turnover of key officers positions within the governmental bureaucracy)

5. Activities of EU Chambers of Commerce Abroad in Asia

Contemporary institutional and political context includes EU's efforts to intensify bilateral or regional trade relationships with Asia ('Global Europe: Competing in the World', EU DG Trade, 2006)

The coming into force of the Lisbon Treaty (2009) moved international trade policy, including trade of services, trade-related intellectual property rights protection, and foreign investment, to the exclusive competence of the EU

Instance: Free Trade Agreement (FTA) between the EU and South Korea (signed 6.10.2010, come into force 1.7.2011). It is unprecedented in terms of scope and rapidity of tariff liberalisation and removal of non-trade barriers across several sectors (including automotive, pharmaceuticals, and consumer electronics).

Regarded as a 'template FTA' for other similar negotiations

5. Shifting institutional context

Type of CCA Activities Orientation

'Proto-CCA' Maintenance of registered address, at least minimal networking between members, emergent visibility

Establishing membership base and enlarging membership

'Transit node' Gathering data and providing general information on the country and industries, facilitating networking through social events and other venues

Strengthening ties between members and diffusing information

'Service provider' Providing legal assistance and advice, advertisement and sponsorship, translation and interpreter services, organisation and assistance for business meetings and trade missions, and organisation and assistance for participating to trade fairs and exhibitions

Meeting business needs of specific members

'Prospector' Gathering data and providing information on specific companies and markets, searching and screening potential suppliers and business partners

Realising business opportunities

'Policy advocate' Managing issue-specific committees, formulating policy issues, and communicating issues and policy proposals to policy-makers

Representing policy positions on international trade and foreign investment issues within policy-making venues

5. Variety of Chambers of Commerce Abroad

Type of CCA Activities Orientation

'Proto-CCA' Maintenance of registered address, at least minimal networking between members, emergent visibility

Establishing membership base and enlarging membership

'Transit node' Gathering data and providing general information on the country and industries, facilitating networking through social events and other venues

Strengthening ties between members and diffusing information

'Service provider' Providing legal assistance and advice, advertisement and sponsorship, translation and interpreter services, organisation and assistance for business meetings and trade missions, and organisation and assistance for participating to trade fairs and exhibitions

Meeting business needs of specific members

'Prospector' Gathering data and providing information on specific companies and markets, searching and screening potential suppliers and business partners

Realising business opportunities

'Policy advocate' Managing issue-specific committees, formulating policy issues, and communicating issues and policy proposals to policy-makers

Representing policy positions on international trade and foreign investment issues within policy-making venues

'Escalation' at the EU, rather than domestic, level:

Instance: establishment of European-ASEAN Business Centre in Thailand, by Eurochambers and various EU member states' CCA, under the patronage of the EU Commission.

It aims to “drafting, publishing and dissemination of joint European industry position papers and lobby them to the Royal Thai Government in regards to new and existing regulations; supporting with trade related information, legal analysis and advisory services (IPR & Standard Helpdesk); organizing 'European Flagship' events/ conferences, seminars and EU pavilions at trade fairs to foster the European dimension in the business community; and interacting as the European business voice in Thailand” (EABC, 2011).

5. Variety of Chambers of Commerce Abroad

Establishing presence and membership base in the host country

Attracting financial (and other) resources needed to install and operate their membership services (deliver value-for-money services in front of membership fees)

Confronting the competition of private service providers for 'on demand' services for members

Develop resources and distinctive capabilities in order to enhance their members' business success prospects (in competition with other countries' CCA efforts)

Collaborating with other EU countries' CCA in 'pushing' policy views to the attention of key decision makers (issues of jurisdictional boundaries and overlaps between national CCA and EU Business Centres)

5. Main issues faced by Chambers of Commerce Abroad

6. Summary

Main points

Internationalisation - the process through which a firm expands its business outside the national (domestic) market – is pursued because of several reasons

The rapid growth of Asian economies triggers a 'global shift' of traditional established patterns of international trade and FDI

Successful internationalisation calls for a careful entry strategy and capacity to cope with various issues

Internationalisation of firms may be supported by various public and private organisations – including Chambers of Commerce Abroad