BA7401_International_Business_Management.docx

CONTENTS CHAPTER TOPICS PAGE NO 1 INTRODUCTION 5 to 26 1.1 Framework 1.1.1 International Busines Definition 1.1.2 Muti National Enterprise 1.1.3 International Management 1.1.4 Globalization of the world 1.1.5 Definition of Globalization...

CONTENTS CHAPTER TOPICS PAGE NO 1 INTRODUCTION 5 to 26 1.1 Framework 1.1.1 International Busines Definition 1.1.2 Muti National Enterprise 1.1.3 International Management 1.1.4 Globalization of the world 1.1.5 Definition of Globalization 1.1.6 Meaning of Globalization 1.2 Internationalization of Business 1.2.1 Meaning 1.2.2 Why International Business 1.3 Factors causing Globalization of Business 1.3.1 Views 1.3.2 Problems 1.3.3 Factors causing Globalization 1.3.4 Ripple factors 1.3.5 Disadvantages 1.4 Country Attractiveness 1.5 International Business Environment 1.5.1 Political Environment 1.5.2 Economic Environment 1.5.3 Cultural Environment 1.6 Protection vs Globalization 2 INTERNATIONAL TRADE & INVESTMENT 27 to 57 2.1 Promotion of Global Business 2.2 Role of GATT & WTO 2.3 Mulilateral Trade nogotiations & Agreements VII & IX 2.4 Challenges for Global Business 2.5 Global Trade & Investment 2.6 Theories of International Trade & Investment 2.7 Need for Global Competitiveness 2.8 Regional trade Block 2.8.1 Types 2.8.2 Advantages 2.8.3 Disadvantages 2.9 RTBs across the globe 3 INTERNATIONAL STRATEGIC MANAGEMENT 58 to 78 3.1 Strategic Compulsions 3.2 Standardization Vs Differentiation 3.3 Strategic options 3.4 Global portfolio management 3.5 Global entry strategies 3.5.1 Advantages 3.6 Organizational issues of international business 3.6.1 Organization Structure 3.6.2 Organization Design 3.7 Controlling of international business 3.8 Performance of global business 3.9 Performance evaluation system. 4 PRODUCTION, MARKETING, FINANCIAL & HUMAN RESOURCE MANAGEMENT OF GLOBAL BUSINESS 79 to 122 4.1 Global production 4.2 Location Decisions 4.3 Scale of operations 4.4 Cost of production 4.5 Make or Buy decisions 4.6 Global supply chain issues 4.7 Quality considerations 4.8 Globalization of markets 4.9 Marketing strategy 4.10 Challenges in product development 4.11 Investment decisions 4.11.1 Economic Considerations 4.11.2 Political Risk 4.12 Sources of fund 4.13 Exchange Rate Risk and management 4.14 Strategic orientation 4.15 Selection of expatriate managers 4.16 Training and development 4.17 Compensation. 5 CONFLICT MANAGEMENT & ETHICS IN INTERNATIONAL BUSINESS MANAGEMENT 123 to 159 5.1 Advantages of international business 5.2 Disadvantages of international business 5.3 Conflict in international business 123 to 159 5.4 Sources and types of conflict 5.5 Conflict resolutions 5.6 Negotiation 5.7 The role of international agencies 5.8 Ethical issues in international business 5.9 Ethical decision-making 7401 - INTERNATIONAL BUSINESS MANAGEMENT (IBM) UNIT I INTRODUCTION 6 International Business – Definition – Internationalizing business-Advantages –factors causing globalization of business- international business environment – country attractiveness – Political, economic and cultural environment – Protection Vs liberalization of global business environment. UNIT II INTERNATIONAL TRADE AND INVESTMENT 11 Promotion of global business – the role of GATT/WTO – multilateral trade negotiation and agreements – VIII & IX, round discussions and agreements – Challenges for global business – global trade and investment – theories of international trade and theories of international investment – Need for global competitiveness – Regional trade block – Types – Advantages and disadvantages – RTBs across the globe – brief history. UNIT III INTERNATIONAL STRATEGIC MANAGEMENT 11 Strategic compulsions-Standardization Vs Differentiation – Strategic options – Global portfolio management- global entry strategy – different forms of international business – advantages - organizational issues of international business – organizational structures – controlling of international business – approaches to control – performance of global business- performance evaluation system. UNIT IV PRODUCTION, MARKETING, FINANCIAL AND HUMAN RESOURCE MANAGEMENT OF GLOBAL BUSINESS 11 Global production –Location –scale of operations- cost of production – Make or Buy decisions – global supply chain issues – Quality considerations- Globalization of markets, marketing strategy – Challenges in product development , pricing, production and channel management- Investment decisions – economic- Political risk – sources of fund- exchange –rate risk and management – strategic orientation – selection of expatriate managers- Training and development – compensation. UNIT V CONFLICT MANAGEMENT AND ETHICS IN INTERNATIONAL BUSINESS MANAGEMENT 6 Disadvantages of international business – Conflict in international business- Sources and types of conflict – Conflict resolutions – Negotiation – the role of international agencies –Ethical issues in international business – Ethical decision-making. TEXT BOOKS Charles W.I. Hill and Arun Kumar Jain, International Business, 6th edition, Tata Mc Graw Hill, New Delhi, 2010. John D. Daniels and Lee H. Radebaugh, International Business, Pearson Education Asia, New Delhi, 2000. K. Aswathappa, International Business, 5th Edition, Tata Mc Graw Hill, New Delhi, 2012. Michael R. Czinkota, Ilkka A. Ronkainen and Michael H. Moffet, International Business, .CHAPTER 1 (INTRODUCTION) International Business – Definition – Internationalizing Business – Advantages – Factors Causing Globalization of Business – International Business Environment – Country Attractiveness – Political, Economic and Cultural Environment – Protection Vs Liberalization of Global Business Environment. INTERNATIONAL BUSINESS MANAGEMENT Framework Definition: International business may be defined simply as business transactions that take place across national borders. Nearly all business enterprises, large and small, are inspired to carry on business across the globe. This may include, purchase of raw materials, from foreign suppliers, assembling products from components made in several countries or selling products or services to customers in other nations. International Business Other definitions: IB field is concerned with the issues facing international companies and governments in dealing with all types of cross border transactions. IB involves all business transactions that involve two or more countries. IB consists of transactions that are devised and carried out across borders to satisfy the objectives of individuals and organizations. IB consists of those activities private and public enterprises that involve the movement across national boundaries of goods and services, resources, knowledge or skills. Multinational Enterprise: A MNE has a worldwide approach to foreign markets and production and an integrated global philosophy encompassing both domestic and international markets. International Management It is defined as a process of accomplishing the global objectives of a firm by Effectively coordinating the procurement, allocation, and utilization of the human, financial, intellectual, and physical resources of the firm within and across national boundaries. . Effectively charting the path toward the desired organizational goals by navigating the firm through a global environment that is not only dynamic but often very hostile to the firm’s very survival International Trade: When a firm exports goods or services to consumers in another country. Foreign Direct Investment: When a firm invests resources in business The Globalization of the World: Globalization of Economy Globalization of markets Globalization of production Decline of barriers to trade (WTO) Increased technological capabilities 60,000 international firms with 500,000 foreign affiliates that generate $11 trillion in sales in 1998 Globalization Trade and investment barriers are disappearing. Perceived distances are shrinking due to advances in transportation and telecommunications. Material culture is beginning to look similar. National economies merging into an interdependent global economic system. Globalization: Pros & Cons Pros Increased revenue opportunity through global sales. Reduced costs by Cons Different nations = different problems. Similarities between nations may be superficial. Global planning may be easy, but global execution is not. Definition of Globalization: The worldwide movement toward economic, financial, trade, and communications integration. Globalization implies the opening of local and nationalistic perspectives to a broader outlook of an interconnected and interdependent world with free transfer of capital, goods, and services across national frontiers. However, it does not include unhindered movement of labor and, as suggested by some economists, may hurt smaller or fragile economies if applied indiscriminately. What is “Globalization”? “The shift toward a more integrated and interdependent world economy.” Markets Production Globalization of Markets: “Merging of historically distinct and separate national markets into one huge global marketplace.” Facilitated by offering standardized products: Citicorp Coca-Cola Sony PlayStation McDonalds Does not have to be a big company to participate: Over 200,00 U.S. companies with less than 100 employees had foreign sales in 2000. The Largest Global Markets: Consumer Goods Industrial Goods and Materials Commodities such as aluminum, oil and wheat. Industrial products such as microprocessors, aircraft. Financial assets such as U.S. Treasury bills and Eurobonds. Industrial Goods and Materials Commodities such as aluminum, oil and wheat. Industrial products such as microprocessors, aircraft. Financial assets such as U.S. Treasury bills and Eur Globalization of production Refers to sourcing of goods and services from locations around the world to take advantage of o Differences in cost or quality of the factors of production Labor Land Capital Globalization of Production “The sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (labor,energy, land and capital).” Companies hope to lower their overall cost structure and/or improve the quality or functionality of their product offering - increasing their competitiveness. INTERNATIONALIZATION OF BUSINESS: Meaning of International Business: International business is a term used to collectively describe all commercial transactions (private and governmental, sales, investments, logistics, and transportation) that take place between two or more nations. Usually private companies undertake such transactions for profit; organizations undertake them for profit for political reasons. A multinational enterprise (MNE) is a company that has a worldwide approach to markets and production or one with operations in more than a country. An MNE is often called multinational corporation (MNC) or transnational company (TCN). Well known MNCs include fast food companies such as McDonald's and Yum Brands, vehicle manufacturers such as General Motors, Ford Motor Company and Toyota, consumer electronics companies like Samsung, LG and Sony, and energy companies such as Exxon Mobil, Shell and BP. Most of the largest corporations operate in multiple national markets. The conduct of international operations depends on companies' objectives and the means with which they carry them out. The operations affect and are affected by the physical and societal factors and the competitive environment. Internationalization of Business has benefited TCS, Asian paints, Wipro, Infosys. It may be understood as those business transactions that involve the crossing of national boundaries'. They include; Product presence in different markets of the world. Production bases across the globe. Human resource to contain high diversity Investment in international services like banking, advertising, tourism, retailing, and construction Transactions involving intellectual properties such as copyrights, patents, trademarks and process technology Why study international business? 1. Increasingly, companies are sourcing their human resource requirement globally, Sony corporation. 2. Most of the products we consume everyday are supplied to us by global businesses. We are sure of quality if the products bear such names as Nike, Toyota, Colgate, Gap T- shirt, and the like. To know these brands is to understand international business 3. Managing an international business is major complex than running a domestic business. Global business involves production of goods in facilities located in different countries with resources, human and physical sourced from all parts of the globe and marketing goods and services to users across the globe. 4. The major impact of international business in this area has been impetus on governments to open up their borders to international trade and investment, standardize their systems and procedures, and adopt internationally acceptable values and attitudes. 5. International business executives play a powerful role in determining the relative competitiveness of various countries in the global arena. . Advantages of international business: Product Flexibility If you have products that don’t sell well in your local or regional market, you may find greater demand abroad. You don’t have to dump unsold inventory at deep discounts. You can search for new markets where your products can sell for even higher prices than they did in your local market. In fact, you may find new products to sell abroad that you don’t offer where you are based. You can offer a much wider range of products when you market globally. Less Competition Company may have come to view competition as a local phenomenon. You can find international markets that have less competition and move quickly to capture market share. This can be particularly advantageous when you have access to high-quality versions of products that are superior to versions in other countries. Though your local competition may have access to the same quality as you have, you will have little competition if you find an international market that has been buying an inferior product. Protection from National Trends and Events When you market to several countries, you are not as vulnerable to events in any one country. For example, if you sell soft drinks with high sugar content, you could discover that your home country frowns upon drinks that offer extra calories. You may be able to sell the same product in another country that has a much different attitude toward these drinks. In addition, a natural disaster in any one market can disrupt business, but you can compensate by focusing your sales efforts in another part of the world. Learning New Methods When you do business in another country, you learn new ways of doing things. You can apply this new knowledge to other markets. For example, according to the Cite Sales website, Unilever discovered a market for laundry detergent that would function in Europe’s high-mineral-content or "hard" water. This product can now be marketed to parts of the U.S. that have similar water problems. The economic benefits that greater openness to international trade bring are: Faster growth: economies that have in the past been open to foreign direct investments have developed at a much quicker pace than those economies closed to such investment e.g. communist Russia Cheaper imports: this is down to the simple fact that if we reduce the barriers imposed on imports (e.g. tariffs, quota, etc) then the imports will fall in price New technologies: by having an open economy we can bring in new technology as it happens rather than trying to develop it internally Spur of foreign competition: foreign competition will encourage domestic producers to increase efficiency. Carbaugh (1998) states that global competitiveness is a bit like golf, you get better by playing against people who are better than you. Increase consumer income: multination will bring up average wage levels because if the multinationals were not there the domestic companies would pay less Increased investment opportunities: with globalization of companies can move capital to whatever country offers the most attractive investment opportunity. This prevents capital being trapped in domestic economies earning poor returns. FACTORS CAUSING GLOBALIZATION: Meaning: Globalization of the economy means reduction of import duties, removal of Non-Tariff Barriers on trade such as Exchange control, import licensing etc., allowing FDI and FPI, allowing companies to raise capital abroad and grow beyond national boundaries and encourage exports. Both Foreign Trade and Foreign investment volume have grown rapidly over the last few years. The IMF defines globalizations as “the growing economic interdependence of countries worldwide through increasing volume and variety of cross border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology.”Saturday, December 08, 2012 Dr. S. Jain 18 Trade Liberalization and Globalization: First, When Tariffs are lowered and QRs are removed, relative prices change and resources are reallocated to production activities that may raise output. However, increased import of manufactured products will have adverse impact on domestic production. Second, larger long run benefits due to the free flow of technology and new production structures. Exports and Imports - most dynamic factors in the process of economic growth after 1995. VIEWS ON GLOBALIZATION: Those stress the Virtues of Import Substitution and limited openness ie, View against Free Trade and Globalization Those emphasize the importance of Free Trade. Arguments Achieve International Competitiveness Reduce the price level More choice for consumers Globalization in different ways: Concept of Multinationals MNCs now account for over 33% of world output, and 66% of world trade Capitalist Approach Privatization + Deregulation + Globalization = Turbo-capitalism = Prosperity Homogeneity Price, Product, Quality, Interest Rates Etc. Spread and connectedness of production, communication and technologies Branding Brands like Coca Cola, Nike, Sony, LG, Intel, Microsoft etc Globalization: Lowered the cost of Transportation Reduced the cost of Communication Revolution in Information and Communication Technologies Change in political systems Collapse of Soviet Union Fall of Berlin Wall China’s Economic Reforms Saturday, December 08, 2012 Dr. S. Jain 24 Stages of Globalization: Ohmae identify five different stages in the development of a firm into a global corporation. The first stage is the arm’s length service activity of essentially domestic company which moves into new markets overseas by linking up with local dealers and distributors. In stage two, the company takes over these activities on its own. In the next stage, the domestic based company begins to carry out its own manufacturing, marketing and sales in the key foreign markets. In stage four, the company moves to a full insider position in these markets, supported by a complete business system including R & D and engineering. In the fifth stage, the company moves toward a genuinely global mode of operation. Essential Conditions for Globalization • Business Freedom• Facilities• Government Support• Resources• Competitiveness• Orientation-Saturday, December 08, 2012 Dr. S. Jain 26 Problems in Globalization: Global competition and imports keep a lid on prices, so inflation is less likely to derail economic growth. An open economy spurs innovation with fresh ideas from abroad. Export jobs often pay more than other jobs. Unfettered capital flows give the US access to foreign investment and keep interest rates low. • Millions of Americans have lost jobs due to imports or production shifts abroad. Most find new jobs that pay less Millions of others fear losing their jobs, especially at those companies operating under competitive pressure. Workers face pay cut demands from employers, which often threaten to export jobs. Service and white collar jobs are increasingly vulnerable to operations moving offshore U S employees can lose their comparative advantage when companies build advanced factories in low-wage countries, making them as productive as those at home. Globalization of Indian Business: India’s economic integration with the rest of the world was very limited because of the restrictive economic policies followed until 1991. Indian firms confined themselves, by and large, to the home market. Foreign investment by Indian firms was very insignificant. With the new economic policy ushered in 1991, there has, however, been a change. Globalization has in fact become a buzz-word with Indian firms now, and many are expanding their overseas business by different strategies. Factors Favoring Globalization: Human Resources Wide Base• Growing Entrepreneurship Growing Domestic Market• Niche Markets Expanding Markets Trans-nationalization of World Economy NRIs Economic Liberalization• Competition FACTORS CAUSING GLOBALIZATION OF BUSINESS: More and more companies are seeking to internalize or globalize their economics for a number of reasons. Developing markets have huge markets Many MNC’s are locating their subsidiaries in low wage countries to take advantage of low cost production. Changing demographics also adds to increasing globalization Regional trading blocs are adding to the pace of globalization. WTO, EU, NAFTA, MERCOSUR and FTAA are major alliances among countries. Trading blocs seek to promote international business by removing trade and investment barriers. Declining trade and investment barriers have vastly contributed to globalization. The most powerful instrument that triggered globalization is technology. The Boston consulting group (2005) has identified five currents of globalization. These currents are; Growth of rapidly developing economics (RDE’s) Continuing cost and capital advantages of RDE’s Development of talent and capabilities in RDE’s Migration of customers to RDE’s Emergence of RDE based global competitors. There is money in international business and no organizations would wish to miss the opportunity. Resource seeking is another motive for firms going international. Globalization is triggered world bodies and institutions. WTO is the international organizations that regulates and promotes business across nations. The main purposes of WTO are a) help free trade b) help negotiate further opening of markets c) settle trade disputes between members. Ripple effects of globalization: Globalization and management Globalization and jobs Globalization and wages Globalization and child labor Globalization and women Globalization and developing countries Inequalities Disadvantages of globalization: The negative drivers of globalization included culture which is a major hold back of globalization. An example of how culture can negatively affect globalization can be seen in the French film industry. The French are very protective of this part of their culture and provide huge grants to help its development. As well as government barriers market barriers and cultural barriers still exist. A negative aspect to a countries development is war e.g. tourism in Israel fell by 40% due to the latest violence. Corporate strategy can also be a negative driver of globalization as corporation may try to locate in one particular area. Another negative driver of globalization is “local focus” or “localization” as it is termed in Richard Douthwaite’s book “Short Circuit”. Douthwaite (1996) believes that globalization can and should be reversed. He also believes that localization is the way to do this. He defines localization as “not meaning everything being produced locally but it means a better a balance between local, regional, national and international markets and thus brings less control to multinational corporations”. Another step to reverse globalization would be for governments to club together to curb the power of multinational by negotiating new trade and treaties that would remove the subsidies powering globalization and give local production a chance. Douthwaite also states that the global economy is itself nothing less than a system of structural exploitation that creates hidden slaves on the other side of the world and also that the North should allow the South to produce for it and not just for us (North). So it can be seen that Douthwaite is very opposed to globalization especially that part of it exploited by multinational corporations. Further arguments put forward against globalization by Mr. Lawton include that it actually destroys jobs in wealthy advanced countries. This is due to the lower costs of wages in developing countries. Multinationals will move to areas of lower wage levels at the drop of a hat e.g. Fruit of the Loom. Also this ability to relocate has meant that wage levels of unskilled workers in developed countries have actually fallen relatively speaking. This is down to the fact that one now needs skill and knowledge in developed economies to survive. Causes the flow of ideas, services, and capital around the world Offers consumers new choices and greater variety Allows the mobility of labor, capital and technology Provides employment opportunities Reallocates resources and shifts activities to a global level TERMINOLOGIES IN INTERNATIONAL BUSINESS: Concept of International Business & International Trade: Exports of goods and services by a firm to a foreign-based buyer (importer) International Marketing: It focuses on the firm-level marketing practices across the border, including market identification and targeting, entry mode selection, and marketing mix and strategic decisions to compete in international markets. International Investments: Cross-border transfer of resources to carry out business activities. International Management: Application of management concepts and techniques in a cross-country environment and adaptation to different social- cultural, economic, legal, political and technological environments. International Business: All those business activities which involves cross border transactions of goods, services, and resources between two or more nations Global Business: Conduct of business activities in several countries using a highly co-ordinate and single strategy across the world. REASONS FOR INTERNATIONAL BUSINESS EXPANSION: Market-Seeking Motives Marketing opportunities due to life cycles Uniqueness of product or service Economic Motives - Profitability Achieving economies of scale Spreading R&D costs Strategic Motives Growth Risk spread TYPES OF INTERNATIONAL BUSINESS: Export-import trade, foreign direct investment, Licensing, Franchising, Management contracts International Business vs. Domestic Business: International business can differ from domestic business for a number of reasons, including the following: – The countries involved may use different currencies, forcing at least one party to convert its currency into another. – The legal systems of the countries may differ, forcing one or more parties to adjust their practices to comply with local law. – The cultures of the countries may differ, forcing each party to adjust its behavior to meet the expectations of the other. – The availability of resources differs by country; the way products are produced and the types of products that are produced vary among countries. Liberalization: In general, Liberalization refers to relaxation(s) of government restrictions, usually in areas of social or economic policy. In some contexts this process or concept is often, but not always, referred to as deregulation. Most often, the term is used to refer to economic liberalization, especially trade liberalization or capital market liberalization. Although economic liberalization is often associated with privatization, the two can be quite separate processes. The economic liberalization in India refers to ongoing economic reforms in India that started on 24 July 1991.Saturday, December 08, 2012 Dr. S. Jain 10 Privatization: Privatization means transfer of ownership and/or management of an enterprise from the public sector to the private sector. It also means the withdrawal of the State from an industry or sector, partially or fully. Another dimension of privatization is opening up of an industry that has been reserved for the public sector to the private sector. Saturday, December 08, 2012 Dr. S. Jain 11 Ways of Privatization: There are different ways of achieving privatization.• One of the important ways of privatization is divestiture, or privatization of ownership, through the sale of equity.• Another way of privatization is contracting. Another option for the government is to withdraw from the provision of certain goods and services leaving them wholly or partly to the private sector.• Privatization may also take the form of privatization of management, using leases and management contracts The important ways of privatization are the following: Divestiture Denationalization Contracting4. Franchising Government withdrawing Privatization of management Liquidation Benefits of Privatization: Privatization benefits the society in several ways. Some of them are Reduces the fiscal burden Enables the government to mop up funds Result in better management of the enterprises Encourage entrepreneurship Managing Business in the Globalization Era Global strategies adopted by business enterprises may include: Global conception of markets Multi-regional integration strategy Changes in external organization of multinational firms Changes in internal organization COUNTRY ATTRACTIVENESS: It is a multidisciplinary concept at the crossroads of development economics, financial economics, comparative law and political science: it aims at tracking and contrasting the relative appeal of different territories and jurisdictions competing for “scarce” investment inflows, by scoring them quantitatively and qualitatively across ad hoc series of variables such as GDP growth, tax rates, capital repatriation. There are multiple factors determining host country attractiveness in the eyes of large foreign direct institutional investors, notably pension funds and sovereign wealth funds. Research conducted by the World Pensions Council (WPC) suggests that perceived legal/political stability over time and medium-term economic growth dynamics constitute the two main determinants Some development economists believe that a sizeable part of Western Europe has now fallen behind the most dynamic amongst Asia’s emerging nations, notably because the latter adopted policies more propitious to long-term investments: “Successful countries such as Singapore, Indonesia and South Korea still remember the harsh adjustment mechanisms imposed abruptly upon them by the IMF and World Bank during the 1997-1998 ‘Asian Crisis’ […] What they have achieved in the past 10 years is all the more remarkable: they have quietly abandoned the “Washington consensus” [the dominant Neoclassical perspective] by investing massively in infrastructure projects. This pragmatic approach proved to be very successful.” Guide to analyze country’s attractiveness Unit One Managerial Implications Two broad implications for IB Political, economic, and legal systems of a country raise important ethical issues that have implications for the practice of international business The political, economic, and legal environment of a country clearly influences the attractiveness of that country as a market and/or investment site Attractiveness Return 1. A country attractiveness assessment is based on two dimensions Market and industry opportunities Country risks (many organizations publish country assessment results based on various economic/political/social factors) Country attractiveness analysis Market opportunities Market opportunities assessment measures the potential demand in the country for a firm’s products or services based on: Market size Growth Quality of demand. Industry opportunities Industry opportunities assessment determines profitability potential of a company’s presence in a country given the following factors: Quality of industry competitive structure (Porter’s five-force Industry Analysis Framework) Resource availability (Porter’s diamond framework) Framework for country market and industry attractiveness assessment MARKET - How important is the demand in this country? + Growth? + Size? + Customer quality Resources Skilled personnel? Raw materials? Components? Labor? Technology? Innovation? Quality of infrastructure supporting services Location Country attractiveness analysis Political risks Political risks are probable disruptions owing to internal or external events or regulations resulting from political action of governments or societal crisis and unrest. Economic risks Economic risks expose business performance to the extent that the economic business drivers can vary and therefore put profitability at stake. Competitive risks Competitive risks are related to non-economic distortion of the competitive context owing to cartels and networks as well as corrupt practices. The competitive battlefield is not even and investors who base their competitive advantage on product quality and economics are at disadvantage. Operational risks. Operational risks are those that directly affect the bottom line, either because government regulations and bureaucracies add costly taxation or constraints to foreign investors or because the infrastructure is not reliable. Framework for country risk analysis Political risks operational risks competitive risks economic risks Shareholders exposure Assets destruction (war, riots) Assets spoliation (expropriation) Assets immobility (transfer, freeze ) Operational Exposure Market disruption Labor unrest Racketing Supply shortages Employees Exposure Kidnapping Gangsterism Harassment Variability Inflation Cost of inputs Exchange rates Business logics Corruption Cartels Networks Infrastructure - Power, Telecommunication, Transport - Supplier Country Risk Analysis Regulations Nationalistic preferences Constraints on local capital, local content, local employment International business environment The environment of international business is regarded as the sum total of all the external forces working upon the firm as it goes about its affairs in foreign and domestic markets. The environment can be classified in terms of domestic, foreign, and international spheres of impact. The domestic environment – is familiar to managers and consists of those uncontrollable external forces that affect the firm in its home market. The foreign environment - can be taken as those factors which operate in those other countries within which the MNC operates. The international environment - is conceived as the interaction between domestic and foreign factors and indeed they cover a wide spectrum of forces The forces: Political environment Legal environment Cultural environment Technological environment Economic environment. Political environment It refers to the influence of the system of government and judiciary in a nation on international business. The type and structure of government prevailing in a country decides, promotes, fosters, encourages, shelters, directs, and controls the business of that country. A political system is stable, honest, efficient, and dynamic and which ensures political participation to the people and assures personal security to the citizens, is a primary factor for economic development. Democracy: refers to a political arrangement in which the supreme power is vested in the people. Democracies maintain stable business environments primarily through laws protecting individual property rights. Ex: India. Merits of democracy: Need for supportive values Function of free speech Classification of political risks Firm specific risks Country specific risks Global specific risks Business risks Foreign exchange risks Governance risks • Ownership structure HR Norms Religious heritage Nepotism & corruption IPR Protectionism Managing political risks Lobbying • Terrorism and war Antiglobaliz ation movement Environment al concerns Poverty Cyber attacks Avoiding investment Terrorism consultants Threat Legal environment The legal system refers to the rules and laws that regulate behavior of organization individuals and Systems of law: There are four basic legal systems prevailing around the world. Islamic law: derived from the interpretation of the Quran and practiced in countries where Muslims are in majority. Ex: Saudi Arabia, Pakistan, Iran. Common law: derived from English law, is prevalent in countries, which were under British influence. Ex: US, Canada, England, Australia. Civil law or code law: derived from Roman law, practiced in Germany, Japan, France, and non - Marxist and non - Islamic countries. Ex: Germany, France, Japan. Marxist legal system: This has takers in communist countries. Ex: China, Vietnam, North Korea and Cuba. Industrial disputes resolution: Legal disputes can arise in three situations: between governments, between a firm and a government, and between two firms. Conciliation: also known as mediation, this is a nonbonding agreement between parties to resolve disputes by asking a third party to mediate. Arbitration: is the preferred method for resolving international commercial disputes. The usual arbitration procedure is for the parties involved to select a disinterested and informed party or parties as referee to determine the merits of the case and make a judgment that both parties agree to honor. Litigation: a wise course of action would be to seek a settlement other than by suing. Cultural environment: According to Elbert W Steward and James A Glynn “Culture consists the thought and behavioral patterns that members of a society learn through language and other forms of symbolic interaction – their customs, habits, beliefs and values, the common viewpoints that bind them together as a social entity. Learned Shared Trans generation al Patterned Symbolic Adaptive Levels of culture: National culture: It is dominant culture within the political boundaries of a country. Business culture: It also provides the guides for everyday business interactions. Occupational and organizational cultures: It’s sister term is corporate culture refers to the philosophies, ideologies, values, assumptions, beliefs, expectations, attitudes and norms that knit an organization together and are shared by its employees Mechanistic and organic cultures: It exhibits the values of bureaucracy and feudalism. Authoritarian and participative cultures: Power is concentrated on the leader and obedience to orders and disciplines are stressed. Participative cultures tend to emerge where most organizational members are professionals or see themselves as equals. Dominant and sub-cultures: Dominant culture, normally referred to as the organizational culture reflects core values that are shared by the majority of the employees. By contrast, sub-cultures are found in departments, divisions and geographical areas and reflect the common problems or experiences of employees who reside in these areas. Strong, Weak and Unhealthy cultures: A Strong culture will have a significant influence on employee behavior manifesting in reduced turnover, lower absenteeism, increased cohesiveness, and positive attitudes. A Weak culture is characterized by the presence of several sub-cultures, sharing of few values and behavioral norms by employees and existence of few sacred traditions. One Unhealthy culture is a politicized internal environment that allows influential manager to operate autonomous “fiefdoms” and resist needed change. Elements of culture Language Customs and manners Attitudes Aesthetics Religion Education Supernatural beliefs Implications for international business Multiculturalism: Managing multiculturalism is essential for every international firm. Spread cross-cultural literacy Compatibility between strategy and culture Culture and competitive advantage Managing diversity. IMPACT OF TECHNOLOGY: Social implications: High expectation of consumers Social systems System complexity Social changes Economic implications: Increased productivity Need to spend on R&D Jobs become intellectual Problems of techno-structure Increased regulation and stiff opposition Rise and decline of products and organizations Boundaries redefined Training of scientists and engineers. Plant level changes: Organization structure Resistance to change Fear of risk E-commerce Patenting Transportation Markets Technology transfers Production Others Operational sequences for technology transfer Arrangements for sales & licensing Provision of know-how & technical expertise Provision of detailed engineering designs & installation Purchases and leases of technology elements Technical cooperation agreements 1.4.2 ECONOMIC ENVIRONMENT: It can help international managers, to predict how trends and events might affect performance of foreign business. Classification on the basis of income: Developing countries: share a set of common and well – defined goals. Ex: India, China. Developed countries: Those are highly industrialized, highly efficient. Ex: Canada, Japan, Australia, US. Countries classified by economic system: Market economy: production of goods and services is not planned by individuals Command economy: decisions relating to all economic activities – what to produce, how to produce. Mixed economy: it includes both. Ex: India. Classification of countries by region: East Asia and Pacific Europe and central Asia Latin America and the Caribbean Middle east and North Africa South Asia Sub-Saharan Africa High income countries Economic nario: Rates of growth Inflation Savings and investment Fiscal stability Balance of payments Financial system Economic policies: Industrial policy Monetary policy Fiscal policy Trade policy Protectionism and Trade Liberalisation Protectionism: Protectionism means by which trade between countries is restricted in some way – normally through measures to reduce the number of imports coming into a country Main means are: Tariffs - A tax on a good coming into a country. increases the price of the good and makes it less competitive Quotas - Physical restriction on the number of goods coming into a country. Non-Tariff Barriers - Any methods not covered by a tariff, most usually: Rules Regulations Voluntary Export Restraints (VERs) Legislation Exacting Standards or Specifications Trade Liberalisation The removal of or reduction in the trade practices that thwart free flow of goods and services from one nation to another. It includes dismantling of tariff (such as duties, surcharges, and export subsidies) as well as nontariff barriers (such as licensing regulations, quotas, and arbitrary standards). In economy and trade Privatization, also spelled as privatization, may have several meanings. Primarily, it is the process of transferring ownership of a business, enterprise, agency, public service or public property from the public sector (a government) to the private sector, either to a business that operates for a profit or to a nonprofit organization. It may also mean government outsourcing of services or functions to private firms, e.g. revenue collection, law enforcement, and prison management Privatization has also been used to describe two unrelated transactions. The first is the buying of all outstanding shares of a publicly traded company by a single entity, making the company privately owned. This is often described as private equity. The second is a demutualization of a mutual organization or cooperative to form a joint-stock company.. Although economic liberalization is often associated with privatization, the two are distinct concepts. For example, the European Union has liberalized gas and electricity markets, instituting a competitive system, but some leading European energy companies such as France's EDF and Sweden's Vattenfall remain partially or completely in government ownership. Liberalized and privatized public services may be dominated by just a few big companies particularly in sectors with high capital costs, or high water, gas, or electricity costs. In some cases they may remain legal monopolies, at least for some segments of the market (like small consumers). Liberalization is one of three focal points (the others being privatization and stabilization) of the Washington Consensus's trinity strategy for economies in transition. There is also a concept of hybrid liberalization as, for instance, in Ghana where cocoa crop can be sold to a variety of competing private companies, but there is a minimum price for which it can be sold and all exports are controlled by the state CHAPTER 2 INTERNATIONAL TRADE AND INVESTMENT Promotion of global business – the role of GATT/WTO – multilateral trade negotiation and agreements – VIII & IX, round discussions and agreements – Challenges for global business – global trade and investment – theories of international trade and theories of international investment – Need for global competitiveness – Regional trade block – Types – Advantages and disadvantages – RTBs across the globe – brief history. Globalization: Deepening relationships and broadening interdependence among people from different countries. International business: All business transactions, private and governmental, that involves two or more countries Two reasons for studying globalization and international business: The growth of globalization creates both opportunities and threats for individuals, companies, and countries. The conduct of international business is distinct from that of domestic business because companies must operate in diverse foreign environments and must engage in specialized types of transactions, such as exporting and importing and currency conversion Why Countries Need International Business Three primary reasons include: Availability Natural advantage: the ability to produce due to readily available resources such as minerals and agricultural products Acquired advantage: based on research and development Most new products originate and find their largest markets in the wealthier countries such as the United States, Germany, Japan, France, the United Kingdom, and Italy The fastest growth area in world trade has been in services, which has grown from less than 4% to more than 20% of world trade between 1980 and 1999 Manufacturing now accounts for less than 20% of the economies of the wealthier countries Cost The production of various goods and services requires different combinations of inputs The cost of these inputs varies from one country to another for a variety of complex reasons Comparative advantage When an individual, firm, or country uses its resources to specialize in the production of those goods and services that are most productive and profitable, it is producing according to comparative advantage Comparative advantage implies specialization. The Growth of Globalization Company’s abilities to exchange goods and services internationally, shift production to other countries, and learn from abroad about more efficient means of operating have been growing because of Technological developments, Rising incomes, Liberalization of cross-border movements, and More cooperative arrangements among countries These four factors interplay and affect each other Foreign direct investment (FDI): investment that results in the foreign control of a domestic enterprise Technological developments: Developments in communications and transportation are at the forefront of technologies that push globalization Rising incomes: Global discretionary income has risen to the point that there is now widespread demand for products that would have been considered luxuries in the past As incomes grow, so does tax revenue Much of the revenue goes to programs and projects that enhance the potential of international business Liberalization of cross-border movements: Every country restricts the movement across its borders of goods and services as well as the resources to produce them Governments today impose fewer restrictions on cross-border movements than they did a decade or two ago for three main reasons: Idea of open economies Greater efficiency by competing against foreign companies Other countries will follow their example Cooperation among countries: Countries cooperate in many ways through international organizations, treaties, and consultations Countries cooperate to: Gain reciprocal advantages Attack problems that cannot be solved alone Deal with concerns lying outside anyone‘s territory Advantages and Challenges of Globalization As the largest economy in the world, the United States has a profound impact on other countries Countries face challenges as they try to maximize positive effects from globalization while minimizing negative ones These are usually trade-offs, such as low consumer prices versus minimal employment disruption The possible trade-offs from globalization are almost unlimited Advantages and Challenges of Globalization Productivity: the amount of output relative to the amount of input Globalization allows the benefits of productivity developments in one nation to move more quickly to other nations A downside to this transfer is that individuals and companies must adjust to compete Consumers Consumers benefit from globalization through their ability to choose from a greater variety of products and services and to buy from cheaper production locations A potential problem is the consumers‘ weaker control over supplies from foreign countries Employment Globalization allows the benefits of productivity developments in one nation to move more quickly to other nations Critics of globalization contend that the quality, as well as the quantity, of jobs should be considered □The Environment Many of the most desired resources are in the poorest areas of the world where people can benefit economically from exploiting these resources On the other hand, concern is high over the depletion of finite resources, potential climatic changes, and despoliation of the environment □Monetary and fiscal conditions An advantage of globalization is that money, if allowed to move freely, should go where it will be most needed and have the highest productivity Monetary, fiscal, and regulatory differences remain Sovereignty Globalization may undermine sovereignty in two ways: Contact with other countries creates more cultural borrowing Countries are concerned that important decisions may be made abroad that will undermine their national well-being What Makes International Business Different? □Different National Environments: Most countries vary internally, causing companies to alter their business practices from one region to another To conduct business successfully abroad, companies must often adopt practices other than what they are accustomed to domestically □Legal-Political Environment: Companies that conduct business internationally are subject to the laws of each country in which they operate Political relationships between countries also influence what companies can do internationally There are sometimes differences in laws between countries □Economic Environment In fact, the average income in most of the world‘s countries is very low Generally, poor countries have smaller markets on a per capita basis, less educated populations, higher unemployment or underemployment, poor health conditions, greater supply problems, higher political risk, and more foreign exchange problems □The Cultural Environment Culture: refers to the specific learned norms of a society based on attitudes, values, beliefs, and frameworks for processing information and tasks These norms vary from one country to another □Mobility Impediments to the movement of goods and the inputs to produce them are more pronounced among countries than within them PROMOTION GLOBAL BUSINESS: Promotional tools. Numerous tools can be used to influence consumer purchases:. Advertising—in or on newspapers, radio, television, billboards, busses, taxis, or the Internet. Price promotions—products are being made available temporarily as at a lower price, or some premium (e.g., toothbrush with a package of toothpaste) is being offered for free. Sponsorships Point-of-purchase—the manufacturer pays for extra display space in the store or puts a coupon right by the product Other method of getting the consumer’s attention—all the Gap stores in France may benefit from the prominence of the new store located on the Champs-Elysees Promotional objectives. Promotional objectives involve the question of what the firm hopes to achieve with a campaign - “increasing profits” is too vague an objective, since this has to be achieved through some intermediate outcome (such as increasing market share, which in turn is achieved by some change in consumers which cause them to buy more). Some common objectives that firms may hold: Awareness: Many French consumers do not know that the Gap even exists, so they cannot decide to go shopping there. This objective is often achieved through advertising, but could also be achieved through favorable point-of-purchase displays. Note that since advertising and promotional stimuli are often afforded very little attention by consumers, potential buyers may have to be exposed to the promotional stimulus numerous times before it “registers.” Trial: Even when consumers know that a product exists and could possibly satisfy some of their desires, it may take a while before they get around to trying the product especially when there are so many other products that compete for their attention and wallets. Thus, the next step is often to try get consumer to try the product at least once, with the hope that they will make repeat purchases. Coupons are often an effective way of achieving trial, but these are illegal in some countries and in some others, the infrastructure to readily accept coupons (e.g., clearing houses) does not exist. Continued advertising and point-of-purchase displays may be effective. Although Coca Cola is widely known in China, a large part of the population has not yet tried the product Attitude toward the product: A high percentage of people in the U.S. and Europe has tried Coca Cola, so a more reasonable objective is to get people to believe positive things about the product - e.g., that it has a superior taste and is better than generics or store brands. This is often achieved through advertising Temporary sales increases: For mature products and categories, attitudes may be fairly well established and not subject to cost-effective change. Thus, it may be more useful to work on getting temporary increases in sales (which are likely to go away the incentives are removed). In the U.S. and Japan, for example, fast food restaurants may run temporary price promotions to get people to eat out more or switch from competitors, but when these promotions end, sales are likely to move back down again (in developing countries, in contrast, trial may be a more appropriate objective in this category) Constraints on Global Communications Strategies. Although firms that seek standardized positions may seek globally unified campaigns, there are several constraints: Language barriers: The advertising will have to be translated, not just into the generic language category (e.g., Portuguese) but also into the specific version spoken in the region (e.g., Brazilian Portuguese). (Occasionally, foreign language ads are deliberately run to add mystique to a product, but this is the exception rather than the rule). Cultural barriers: Subtle cultural differences may make an ad that tested well in one country unsuitable in another. e.g., an ad that featured a man walking in to join his wife in the bathroom was considered an inappropriate invasion in Japan. Symbolism often differs between cultures, and humor, which is based on the contrast to people’s experiences, tends not to travel well. Values also tend to differ between cultures in the U.S. and Australia, excelling above the group is often desirable, while in Japan, “The nail that sticks out gets hammered down.” In the U.S., “The early bird gets the worm” while in China “The first bird in the flock gets shot down.” Local attitudes toward advertising: People in some countries are more receptive to advertising than others. While advertising is accepted as a fact of life in the U.S., some Europeans find it too crass and commercial. Media infrastructure: Cable TV is not well developed in some countries and regions, and not all media in all countries accept advertising. Consumer media habits also differ dramatically; newspapers appear to have a higher reach than television and radio in parts of Latin America. Advertising regulations: 3 Countries often have arbitrary rules on what can be advertised and what can be claimed. Comparative advertising is banned almost everywhere outside the U.S. Holland requires that a toothbrush be displayed in advertisements for sweets, and some countries require that advertising to be shown there be produced in the country. Some cultural dimensions: Directness vs. indirectness: U.S. advertising tends to emphasize directly why someone would benefit from buying the product. This, however, is considered too pushy for Japanese consumers, where it is felt to be arrogant of the seller to presume to know what the consumer would like. Comparison: Comparative advertising is banned in most countries and would probably be very counterproductive, as an insulting instance of confrontation and bragging, in Asia even if it were allowed. In the U.S., comparison advertising has proven somewhat effective (although its implementation is tricky) as a way to persuade consumers what to buy. Humor: Although humor is a relatively universal phenomenon, what is considered funny between countries differs greatly, so pre-testing is essential. Gender roles. A study found that women in U.S. advertising tended to be shown in more traditional roles in the U.S. than in Europe or Australia. On the other hand, some countries are even more traditional—e.g., a Japanese ad that claimed a camera to be “so simple that even a woman can use it” was not found to be unusually insulting. Explicitness: Europeans tend to allow for considerably more explicit advertisements, often with sexual overtones, than Americans. Sophistication. Europeans, particularly the French, demand considerably more sophistication than Americans who may react more favorably to emotional appeals - e.g., an ad showing a mentally retarded young man succeeding in a job at McDonald’s was very favorably received in the U.S. but was