Chapter 1.pptx

Chapter One: International Business and Globalization Dr. Hadeel Abdellatif Opening Case: The globalized business of sports Although not everyone agrees that globalization of professional sports is all for the good, the process and possibilities are definitely far reaching. Today’s satellite televis...

Chapter One: International Business and Globalization Dr. Hadeel Abdellatif Opening Case: The globalized business of sports Although not everyone agrees that globalization of professional sports is all for the good, the process and possibilities are definitely far reaching. Today’s satellite television broadcasts enable fans to watch top players and teams in nearly any sport from almost anywhere on earth. Professional teams scour the world to find and develop the most talented athletes, and players forsake home country allegiances in their pursuit of the world’s highest salaries. Further, the more people that tournaments can attract through attendance and television, the more money that sponsors and advertisers are willing to pay—and the greater the likelihood that those sponsors and advertisers will have business operations that span the globe. In addition, sports and non sports companies alike pay famous athletes and teams generous sums to endorse their products. Successful teams have opened shops both domestically and internationally to sell souvenirs bearing their logos and may make more money on merchandise than from TV rights and sponsorships combined. Most recently, as teams and leagues have begun to seek income opportunities outside their home countries looking for foreign investors. Professional athlete A is a star. And professional athlete B is an average player. How has the globalization of professional sports affected each of these both positively and negatively? Relationship between International Business (IB) and Globalization Globalization: is the widening and deepening of interdependent relationships among people from different nations. International business: consists of all commercial transactions between two or more countries. IB Relation to Globalization: The global connections between supplies and markets result from the activities of IB, which are all commercial transactions (including sales, investments, and transportation) that take place among countries. Private companies undertake such transactions for profit; governments may undertake them either for profit or for other reasons. Factors in IB Operations The Study of IB Not only do companies sell output and secure supplies and resources abroad, they compete against products, services, and companies from foreign countries. Thus, most managers need to take into account IB when setting their operating strategies and practices. 1. Understanding the Environment/Operations Relationship International companies have more diverse and complex operating environments than purely domestic ones. 2. Making Nonbusiness Decisions A better understanding of IB will help you make more informed decisions, such as where to work and what governmental policies to support. The forces driving globalization and IB Globalization is a difficult concept to measure. Currently, about a quarter of world production is sold outside of its country of origin, restrictions on imports continue to decline, the foreign ownership of assets as a percent of world production continues to increase, and world trade continues to grow more rapidly than world production. (1) smaller countries tend to be more globalized than larger ones, mainly because their smaller land masses and populations permit a lower variety of production, (2) countries with higher per capita incomes tend to be more globalized than those with lower ones because their citizens can better afford foreign products, travel, and communications and (3) although a country may rank as highly globalized on one dimension, it may be low on another, such as the United States being high on technological scales but low on economic ones. Factors in Increased Globalization 1. Rise in and Application of Technology Advances in communications and transportation have significantly increased the effectiveness and efficiency of international business operations. Today, a much larger portion of the population is involved in the development of new products, than just the production of products. 2. Liberalization of Cross-Border Trade and Resource Movement Over time most governments have lowered restrictions on trade and foreign investment in response to the expressed desires of their citizens and producers. The primary motives for this change include giving citizens greater consumer choice and lower prices, international competition making domestic producers more efficient, and the hope that liberalization will cause other countries to also lower trade barriers. 3. Development of Services That Support International Business Services provided by government, banks, transportation companies, and other businesses greatly facilitate the conduct and reduce the risks of doing business internationally. 4. Growth of Consumer Pressures Because of innovations in transportation and communications technology, consumers are well informed about and often able to access foreign products. Thus competitors over the world have been forced to respond to consumers’ demand for increasingly higher quality and more cost-competitive offerings. Consumer pressure has also forced companies to spend more on research and development (R&D) and to search worldwide for innovations and products they can sell to ever-more-demanding consumers. 5. Increased Global Competition The pressures of increased foreign competition often persuade firms to expand internationally in order to gain access to foreign opportunities and to improve their overall operational flexibility and competitiveness. 6. Changes in Political Situations and Government Policies Today, only a few countries are heavily isolated economically or do business almost entirely within a political bloc. In fact, political changes sometimes open new frontiers, such as diplomatic relations between the United States and Cuba. In addition, the improvements in national infrastructure and the provision of traderelated services by governments the world over have further led to substantial increases in foreign trade and investment levels. 7. Expansion of Cross-National Cooperation Governments have increasingly entered into cross-national treaties and agreements in order to gain reciprocal advantages for their own firms, to jointly attack problems that one country cannot solve alone, and to deal with areas of concern that lie outside the territory of all countries. The criticisms of globalization A. Threats to National Sovereignty Many citizens fear that a country’s participation in multilateral agreements will diminish its sovereignty and freedom from external control and curtail its ability to act in its own best interests. In particular, people in small countries worry that dependence on larger countries for sales and/or supplies, as well as the presence of large international firms, will make them vulnerable to the demands of parties against which they are essentially powerless. B. Environmental Stress Much critique of globalization revolves around the economic growth it brings. One argument is that growth in both production and international travel consumes more nonrenewable natural resources and increases environmental damage. However, other factions assert that globalization is positive for conserving natural resources and maintaining an environmentally sound planet. The positive effects of pursuing global interests may, nevertheless, conflict with national interests. C. Growing Income Inequality and Personal Stress By various measurements, income inequality, with some notable exceptions, has been growing both among and within many countries. Although globalization has brought unprecedented opportunities for firms to profit by gaining more sales and cheaper or better supplies, critics argue that profits have gone disproportionately to the top executives rather than to the rank and file. Thus, even if the overall global gains from globalization are positive, there remains a continuing challenge to bring about the positive gains in ways that minimize costs to the losers. It is easy to think about the impacts of globalization at a macro level, but individuals are impacted very specifically, causing stress and insecurity. Why companies engage in international business When engaging in international business, a firm should consider its mission, its objectives, and its possible strategies. Primary objectives would include the following: A. Expanding Sales Companies may increase the potential market for their sales by pursuing international consumer and industrial markets. B. Acquiring Resources Foreign-sourced products, services, resources, and components can make a firm more competitive both at home and abroad. C. Reducing Risk Firms seek foreign markets in order to minimize cyclical effects on sales and profits. Defensively, they may also wish to counter the potential advantages that competitors might gain from participating in foreign market opportunities. International Business Operating modes A. Merchandise Exports and Imports: exports consist of tangible (visible) products, i.e., goods that are sent to a foreign country for use or resale. imports consist of tangible products, i.e., goods brought into a country for use or resale. B. Service Exports and Imports represent intangible (invisible), i.e., non-merchandise products. 1. Tourism and Transportation. When an American flies to Paris on Air France and stays in a Frenchowned hotel, payments made to the airline and the hotel represent service export earnings (income) for France and service import payments (expenses) for the United States. 2. Service Performance. Some services, such as banking, insurance, rental, engineering, turnkey operations (construction, performed under contract, of facilities that are transferred to the owner when they are ready for operation), and management contracts (arrangements in which one firm provides personnel to perform management functions for another), net companies export earnings in the form of fees paid by a foreign client. 3. Asset Use. Firms may receive export earnings, i.e., royalties, by allowing foreign clients to use their assets (trademarks, patents, copyrights, and other expertise). Licensing agreements are contracts that represent a transaction in which a licensor sells the rights to the use of its intellectual property to a licensee in exchange for a fee or royalty. Franchising is a special form of licensing in which the franchisee is granted additional control over the operation in exchange for the provision of additional support and services by the franchisor. C. Investments Foreign investment consists of the ownership of foreign property for the purpose of realizing a financial gain via profits, growth, dividends, and/or interest. 1. Direct Investment. Foreign direct investment (FDI) occurs when an investor gains a controlling interest in a foreign operation. A joint venture represents a direct investment in which two or more parties share ownership of an FDI. 2. 2. Portfolio Investment. Portfolio investment is a noncontrolling interest in a venture made in the form of either debt or equity. Often, firms use portfolio investment as part of their short-term financial strategy. Types of International Organizations There are numerous forms of collaborative arrangements through which companies work together internationally, such as joint ventures, licensing agreements, management contracts, minority ownership, and long-term contractual arrangements. A strategic alliance is more narrowly defined to indicate that the agreement is of critical importance to the competitive viability of one or more of the partners. The multinational enterprise (MNE) is a firm that takes a global approach to foreign markets and production, i.e., it is willing to consider markets and production sites anywhere in the world. The terms multinational corporation (MNC) and transnational company (TNC) may also be used in this context. Factors Affecting Ability to Operate Abroad Smart companies develop the means to implement international strategies by examining the following conditions abroad that can affect their success: Physical factors (such as geography or demography) Institutional factors (such as culture, politics, law, and economy) Competitive factors (such as the number and strength of suppliers, customers, and rival firms) A. Physical Factors 1. Geographic Influences. The uneven distribution of resources results in different opportunities being located in different parts of the world. In addition, geographic barriers affect transportation, communications, and distribution channels within a country. Managers who are knowledgeable about geography are in a position to better determine the location, quantity, quality, and availability of the world’s natural resources and conditions. 2. Demographic Influences. Countries’ populations differ in many ways, such as density, education, age distribution, and life expectancy. These differences impact IB operations, such as market demand and workforce availability. B. Institutional Factors 1. Political Policies. A nation’s political policies influence how and if IB takes place because of the influence of government leaders over the process. 2. Legal Policies. While every nation has its own body of business law, agreements between/amongst nations determine international law. Domestic business law may include regulations on home-country firms in both home and host countries regarding such matters as taxation, employment, and foreign exchange transactions. International law— in the form of legal agreements between countries—determines how earnings are taxed by all jurisdictions. Also, the ways in which laws are enforced also affect a firm’s foreign operations 3. Behavioral Factors. By studying the disciplines of anthropology, psychology, and sociology, managers can better understand the interpersonal norms of people in foreign countries and the reasons why operating procedures may need to be adjusted in foreign locales. 5. Economic Forces. Among other things, economics explains why countries exchange goods and services, why capital and people travel among countries in the course of business, and why one country’s currency has a certain value compared to another. It also provides the analytical tools to determine the impact of foreign operations on home and host countries, as well as the effect of a country’s economic policies and conditions upon domestic and foreign firms. C. The Competitive Environment In addition to its physical and social environments, every globally active company operates within a competitive environment. Companies’ competitive situations may differ by their relative size in different countries, the competitors they face by country, and the resources they can commit internationally. A firm’s competitive strategy for products will usually involve competing on the basis of cost or differentiation. Other competitive factors are a company’s size and resources compared to those of its competitors. Finally, market success, whether domestic or foreign, often depends on the strength of competition and whether it is international or local. Closing Case: Transportation and Logistics: The Case for Dubai Ports World The spike in the growth rates for the logistics and transportation industries have been owed to many reasons including the separation of raw materials, labor and production, decline in tariffs, import restrictions, and exchange rate controls. The World Bank and other prominent organizations have instituted policies and led initiatives spurring such growth. Ports serve as an important link in the global supply chain of logistics and transportation. The Dubai Ports World is a good example of a transportation and logistics company that operates in sixty-five terminals across six continents successfully. Government policies often influence the logistics operations and these include restrictive trade policies or agreements that distort competition, place embargoes, enforce business visa restrictions and list security requirements. The evolution of logistics clusters which are geographic concentrations of logistics related activities, are thus crucial to the proper health of the industry. Singapore, the Netherlands, Los Angeles, Dubai, Sao Paulo, and Aragon are some of the leading logistics clusters, their development being dependent on heavy investment in infrastructure. Dubai Ports World thus invests heavily in people and technology to deliver the highest quality of customer service and experience across its network of operations. Questions What factors have contributed to the growth of the transportation and logistics industry and how? What steps has DP World taken to benefit from global economic changes. What economic factors influence the success of the international transportation and logistics industry?