Globalization B390 International Business PDF

School of Business and Economics Department of International Business Globalization B390 International Business Dr. Cristina Popescu  B390 International Business...

School of Business and Economics Department of International Business Globalization B390 International Business Dr. Cristina Popescu  B390 International Business GLOBALIZATION Your personal globalization inventory How many languages do you speak? How many countries have you lived in or visited? Do you have friends from other countries (e.g. from during an exchange year/semester)? How many different countries are they from? 2 | Department of International Business / Cristina Popescu  B390 International Business GLOBALIZATION Your personal globalization inventory Think about everything you are wearing and that you are currently carrying with you: Where did each item come from? What items have components/parts that came from somewhere else? What items have raw materials that came from somewhere else? 5 | Department of International Business / Cristina Popescu 6 | Department of International Business / Cristina Popescu  FP, April 2022 Al Jazeera, March 2022 New York Times, March 2022 IMF Blog, March 2022 7 | Department of International Business/ Cristina Popescu  Spiegel, 27.07.2022 Zeit, 15.08.2022 8 | Department of International Business/ Cristina Popescu  B390 International Business GLOBALIZATION What is globalization? Globalization refers to the trend towards a more integrated global economic system. Key facets of globalization are: the globalization of markets the globalization of production 9 | Department of International Business / Cristina Popescu  B390 International Business GLOBALIZATION Globalization of markets Globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. In many markets today, the tastes and preferences of consumers in different nations are converging upon some global norm. 10 | Department of International Business / Cristina Popescu  B390 International Business GLOBALIZATION Globalization of production Globalization of production refers to 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. Firms globalize their production to lower overall cost structure or improve the quality or functionality of their product and gain competitive advantage. 11 | Department of International Business / Cristina Popescu  B390 International Business GLOBALIZATION Changing world output and world trade picture In the early 1960s: the U.S. was the dominant industrial power accounting for about 38.3% of world output (measured by GDP). And in 2020… 14 | Department of International Business / Cristina Popescu  B390 International Business GLOBALIZATION Changing world output and world trade picture Source: CNBC 15 | Department of International Business / Cristina Popescu  B390 International Business GLOBALIZATION Changing world output and world trade picture 16 | Department of International Business / Cristina Popescu  B390 International Business GLOBALIZATION Changing world output and world trade picture 17 | Department of International Business / Cristina Popescu  B390 International Business GLOBALIZATION The changing multinational enterprise Globalization has resulted in a decline in the dominance of U.S. firms in the global marketplace. In 2003, 38.8 % of the world’s 2000 largest MNEs were U.S. firms. By 2019, just 28.8% of the world’s 2000 largest MNEs were from the U.S. Small and medium-size firms are now expanding internationally. It is now easier for them to build international sales via the Internet. 19 | Department of International Business / Cristina Popescu  B390 International Business GLOBALIZATION The changing world order The collapse of communism in Eastern Europe brought along export and investment opportunities. The economic development in China creates huge opportunities despite the continued control through the one party system. War in Ukraine 20 | Department of International Business / Cristina Popescu  B390 International Business GLOBALIZATION The globalization debate Many experts believe that globalization is promoting greater prosperity in the global economy, more jobs, and lower prices for goods and services. Others feel that globalization is not beneficial. Critics worry economic power is shifting away from national governments. 21 | Department of International Business / Cristina Popescu  B390 International Business GLOBALIZATION Globalization, jobs and income Critics claim jobs in advanced economies are being lost to low-wage nations. Supporters claim while some jobs may be lost, the economy as a whole is better off. Free trade will result in countries specializing in the production of those goods and services that they can produce most efficiently, while importing goods and services that they cannot produce as efficiently, and that in doing so, all countries will gain. 22 | Department of International Business / Cristina Popescu  B390 International Business GLOBALIZATION Globalization, jobs and income “We will bring back our jobs. We will bring back our borders. We will bring back our wealth. And we will bring back our dreams. We will build new roads and highways and bridges and airports and tunnels and railways all across our wonderful nation. We will get our people off of welfare and back to work rebuilding our country with American hands and American labor. We will follow two simple rules: buy American and hire American.” Donald Trump’s inaugural address 23 | Department of International Business / Cristina Popescu  B390 International Business GLOBALIZATION Globalization and the world’s poor Critics argue the gap between rich and poor has gotten wider and the benefits of globalization have not been shared equally. Supporters suggest that the actions of governments have made limited economic improvement in many countries. Many of the world’s poorest nations are under totalitarian regimes, suffer from endemic corruption, have few property rights, are involved in war, and are burdened by high debt. The COVID-19 pandemic has exacerbated many existing inequalities. 24 | Department of International Business / Cristina Popescu  World Inequality Report, 2022 25 | Department of International Business/ Cristina Popescu  World Inequality Report, 2022 26 | Department of International Business/ Cristina Popescu  B390 International Business GLOBALIZATION Managing in the global marketplace Managing an international business differs from managing a domestic business in the following key ways: Countries differences require companies to vary their practices country by country. International companies must work within the limits imposed by governmental intervention. Managers of MNEs face a greater and more complex range of problems. 27 | Department of International Business / Cristina Popescu What’s next? 28 | Department of International Business/ Cristina Popescu  School of Business and Economics Department of International Business International Human Resource Management Cristina Popescu Introduction Human resource management (HRM) covers the activities an organization carries out to utilize its human resources effectively. HRM activities include: staffing performance evaluation personnel development compensation 2 | International Business/ Cristina Popescu Introduction HRM is more complex in an international business because of differences between countries in - labor market regulations - social stratification and living standards - welfare systems - household, family and gender systems 3 | International Business/ Cristina Popescu International HRM International HRM deals with issues related to expatriate managers (citizens of one country working abroad) including when to use expatriates who to send on expatriate posting how expatriates should be compensated how to handle the repatriation of expatriates. 4 | International Business/ Cristina Popescu Motives for international transfers The most common reasons for companies to send employees abroad are: - to fill in positions - management development - knowledge transfer 5 | International Business/ Cristina Popescu  The international assignment process Personal traits Family situation Selection and preparation Technical competence Work Adjustment Interaction during the General assignment Job clarity Repatriation Support of the organisation 6 | International Business/ Cristina Popescu Expatriate managers Firms that use expatriates must consider the problem of expatriate failure - the premature return of an expatriate manager to his home country. 7 | International Business/ Cristina Popescu Expatriate managers Main reasons for expatriate failure: - the inability of the spouse to adapt to a foreign culture - the inability of the manager to adjust - other family related reasons - the manager’s personal or emotional maturity level - the manager’s inability to cope with larger overseas responsibilities 8 International Business/ Cristina Popescu Training for expatriate managers To reduce expatriate failure, firms should provide cultural training which seeks to foster an appreciation for the host country's culture, language training which improves the effectiveness of managers and helps them better relate to the foreign country, and practical training which helps the expatriate manager and family ease into day-to-day life of the host country. 9 | International Business/ Cristina Popescu Repatriation of expatriates Managers need to be prepared for reentry into their home country organization. This involves HRM planning to determine the role of the employee in the home country at the end of the assignment and how to utilize the knowledge the employee acquired while abroad. 10 | International Business/ Cristina Popescu Performance appraisal problems When evaluating employees, home country managers tend to rely on hard data host country managers can be biased towards their own frame of reference So, many firms rely on both groups to evaluate the performance of expatriate managers. 11 | International Business/ Cristina Popescu Guidelines for performance appraisal To reduce bias, more weight should be given to an on-site manager's appraisal than to an off-site manager's appraisal, a former expatriate who has served in the same location should be involved in the appraisal process, and 12 | International Business/ Cristina Popescu Compensation There are two key issues how compensation should be adjusted to reflect national differences in economic circumstances and compensation practices, and how expatriate managers should be paid. 13 | International Business/ Cristina Popescu Expatriate pay The most common approach to expatriate pay is the balance sheet approach. This approach equalizes purchasing power across countries so employees can have the same standard of living in the foreign country as they do at home. Typical compensation packages include - the base salary - a foreign service premium - allowances of various types - benefits and - tax differentials. 14 | International Business/ Cristina Popescu Expatriate pay The base salary is normally in the same range as the base salary for a similar position in the home country. A foreign service premium is extra pay the expatriate receives for working outside his country of origin. It is offered as an inducement to accept foreign postings. Allowances often include hardship allowances housing allowances cost-of-living allowances and/or education allowances 15 | International Business/ Cristina Popescu Expatriate pay Benefits: Many expatriates receive the same level of medical and pension benefits abroad that they received at home. Taxation: The expatriate may have to pay income tax to both the home country and the host-country governments unless a host country has a reciprocal tax treaty with the expatriate’s home country. When a reciprocal tax treaty is not in force, the firm typically pays the expatriate’s income tax in the host country. 16 | International Business/ Cristina Popescu Female expatriates Outdated belief that women do not wish to take on an IA Issues with differences in gender systems Advancement and promotion issues Social capital Self-initiated assignments 17 | International Business/ Cristina Popescu Self-initiated expatriates (SIEs) Opportunities of SIEs Challenges of SIEs For expats For expats Career self-management Met expectations Career advancement Underemployment Self-actualization For companies For companies Strategic human capital Recruitment and retention 18 | International Business/ Cristina Popescu Multinational teams (MNTs) MNTs have become the standard work structure in corporations. Under the right conditions, MNTs overperform culturally homogenuous teams because they tend to be more creative. Nevertheless, statistics show that MNTs usually tend to underperform culturall homogenuous teams because of the multitude of challenges: - task conflicts - direct vs indirect confrontation - trust - direct and indirect communication - language (vocabulary and fluency) 19 | International Business/ Cristina Popescu 20 | International Business/ Cristina Popescu  School of Business and Economics Department of International Business Global Manufacturing and Supply Chain Management Cristina Popescu Introduction International firms must answer these interrelated questions: 1. Which production activities should we make ourselves, and which should we outsource? 2. Where should production activities be located? 3. What should the long-term strategic role of foreign production sites be? 4. Should the firm manage global logistics itself, or should it outsource the management to enterprises that specialize in this activity? 2 | Multinational Business/ Cristina Popescu Value chain according to Porter (1985) Source: www.ifm.eng.cam.ac.uk 4 | Multinational Business/Cristina Popescu Strategy, production and logistics To lower costs, firms can: disperse production to those locations where activities can be performed most efficiently To improve quality, firms can: eliminate defective products from the supply chain and the manufacturing process. improved quality will also help to reduce costs. 5 | Multinational Business/ Cristina Popescu Strategy, production and logistics International companies have two other important production and logistics objectives: Production and logistics functions must be able to accommodate demands for local responsiveness. Production and logistics must be able to respond quickly to changes in customer demand. 6 | Multinational Business/ Cristina Popescu Strategy, production and logistics To increase product quality, most firms today use the Six Sigma program which aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company. Six Sigma, a direct descendant of total quality management (TQM), has a goal of improving product quality. In the European Union, firms must meet the standards set forth by ISO before the firm is allowed access to the European marketplace. Source: sixsigma-training.org.uk 7 | Multinational Business/ Cristina Popescu Supply chain strategy Compatibility is the degree of consistency between investment decision and competitive advantage/strategy. Factors that influence the alignment between operations and strategy: - pressure to reduce cost - delivery time - quality and innovation 8 | Multinational Business/ Cristina Popescu Where to produce Three factors are important when making location decisions: country factors technological factors product factors Source: ahw-bremen.de 9 | Multinational Business/ Cristina Popescu Country factors Firms should locate manufacturing activities in those locations where economic, political, and cultural conditions, including relative factor costs, are most favourable to the performance of that activity. 10 | Multinational Business/ Cristina Popescu Country factors Country factors that can affect location decisions include: - the availability of skilled labor and supporting industries - formal and informal trade barriers - expectations about future exchange rate changes - transportation costs - regulations affecting foreign direct investment 11 Multinational Business/ Cristina Popescu Technological factors The level of fixed costs: If the fixed costs of setting up a manufacturing plant are high, it might make sense to serve the world market from a single location or from a few locations. When fixed costs are relatively low, multiple production plants may be possible. Producing in multiple locations allows firms to respond to local markets and reduces dependency on a single location. 12 | Multinational Business/ Cristina Popescu Technological factors The minimum efficient scale: The larger the minimum efficient scale (the level of output at which most plant-level scale economies are exhausted) of a plant, the more likely centralized production in a single location or a limited number of locations makes sense. A low minimum efficient scale allows the firm to respond to local market demands and hedge against currency risk by operating in multiple locations. 13 | Multinational Business/ Cristina Popescu Product factors Two product factors impact location decisions: 1. the product's value-to-weight ratio: If the value-to-weight ratio is high, it is practical to produce the product in a single location and export it to other parts of the world If the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations across the world 2. whether the product serves universal needs: When products serve universal needs, the need for local responsiveness falls, increasing the attractiveness of concentrating manufacturing in a central location. 14 | Multinational Business/ Cristina Popescu Decentralizing production into different countries Advantages of decentralizing production activities into different countries 15 | Multinational Business/ Cristina Popescu Centralizing production Advantages of a centralized production: 16 | Multinational Business/ Cristina Popescu The strategic role of foreign factories The strategic role of foreign factories and the strategic advantage of a particular location can change over time. Factories initially established to take advantage of low cost labor can evolve into facilities with advanced design capabilities. As governmental regulations change and/or countries upgrade their factors of production the strategic advantage of a particular location can change. 17 | Multinational Business/ Cristina Popescu Omnichannel “Working in silos” – the channels exist side-by-side without interacting. Customers cannot buy across different channels, such as making an online order and picking the item up in the store. Omnichannel: the customer can buy across all channels, and all the information about the buying process is available on all channels, ideally in real time. Reasons: - purchasing is dynamic, driven by increasing internet and mobile use, and it has more ”touch points” than ever - customers expect a personalized shopping experience: 71% of all customers expect to view in-store inventory online, while 50% expect to buy online and pick up in-store 18 | Multinational Business/Cristina Popescu Outsourcing production: make-or-buy decisions Should an international business make or buy the component parts to go into their final product? Make-or-buy decisions are important factors in many firms' manufacturing strategies Today, service firms also face make-or-buy decisions as they choose which activities to outsource and which to keep in-house. Make-or-buy decisions involving international markets are more complex than those involving domestic markets. 19 | Multinational Business/ Cristina Popescu The advantages of in-house production (“make”) Vertical integration (making component parts in-house) can lower costs: If a firm is more efficient at that production activity than any other enterprise, it may pay the firm to continue manufacturing a product or component part in-house. facilitate investments in highly specialized assets: Internal production makes sense when substantial investments in specialized assets (assets whose value is contingent upon a particular relationship persisting) are required to manufacture a component. 20 | Multinational Business/ Cristina Popescu The advantages of in-house production (“make”) Vertical integration (making component parts in-house) can protect proprietary technology: A firm might prefer to make component parts that contain proprietary technology in-house in order to maintain control over the technology. facilitate the scheduling of adjacent processes: The weakest argument for vertical integration is that the resulting production cost savings make planning, coordination, and scheduling of adjacent processes easier. 21 | Multinational Business/ Cristina Popescu Trade-offs The benefits of manufacturing components in-house are greatest when: highly specialized assets are involved vertical integration is necessary for protecting proprietary technology the firm is more efficient than external suppliers at performing a particular activity. 22 | Multinational Business/ Cristina Popescu The advantages of outsourcing (“buy”) Buying component parts from independent suppliers: gives the firm greater flexibility: - By buying component parts from independent suppliers, the firm can maintain its flexibility, switching orders between suppliers as circumstances dictate. - This is particularly important when changes in exchange rates and trade barriers alter the attractiveness of various supply sources over time. 23 | Multinational Business/ Cristina Popescu Lessons from the COVID-19 pandemic Supply chains not only became more global in recent decades but they also became increasingly dependent on key exporting economies like China, along with the JIT business model that was optimized to maintain low costs and reduced inventories. 24 | Multinational Business/ Cristina Popescu Lessons from the COVID-19 pandemic Furthermore, regulatory policies are crucial for all healthcare supply chains Transparency of international supply chains, where informal subcontracting has often compromised quality and lowered confidence in these arrangements has become salient. Contingency plans for future crises will be essential. COVID-19 has revealed a great deal about the inadequacy of current policies and global supply chains to respond to the public health and economic crises unleashed by the pandemic. 25 | Multinational Business/ Cristina Popescu Trends in offshoring From 1970 to 2010, the share of global manufacturing value added for the G7 nations dropped from 71 to 46 per cent, taken up by the emerging countries, particularly China - difficult to determine exactly where many products are made - “made in the world” (WTO, 2011) - “re-shoring” (or “back-shoring” or “near-shoring”) - bringing production closer to the company’s home base or to its major markets 26 | Multinational Business/ Cristina Popescu Trends in offshoring – re-shoring Brennan, L., Ferdows, K., Godsell, J., Golini, R., Keegan, R., Kinkel, S.,... & Taylor, M. (2015). Manufacturing in the world: where next?. International Journal of Operations & Production Management, 35(9), 1253-1274. 27 | Multinational Business/ Cristina Popescu Trends in offshoring Other factors in support of local manufacturing: - Providing customized products and services - Rising labour costs in emerging countries as a result of their economic catching - up processes Game-changing alternative to the conventional manufacturing: 3-D printing - disruptive technology, which has been hailed by some scholars as the Third Industrial Revolution (The Economist, 2012) - has the potential to accelerate the pace of re-shoring 28 | Multinational Business/ Cristina Popescu Trends in manufacturing Industry 4.0 is still in its infancy, and the widespread deployment of many of its constituent technologies is still some years away. But its effects are already having an impact upon the nature of competition and corporate strategies in many industries (Porter and Heppelmann, 2014; Rübmann et al., 2015; Lorenz et al., 2016; Rose et al., 2016): - greater automation will displace lower-skilled labour but increase demand for higher-skilled labour - enhanced machine-to-machine and machine-to-human interaction will allow greater product customisation - distribution will be affected by unmanned logistic drones 29 | Multinational Business/ Cristina Popescu Trends in manufacturing International business is based on a concept of geography that may be partially challenged in an Industry 4.0 scenario (Gress and Kalafsky, 2015). Greater use of robotic systems will minimise the cost economies that are realised from locating manufacturing activities in low labour cost countries, such as the emerging economies. Will this mean that such activities are reshored to traditional (advanced economy) locations? If so, what will be the impact upon employment opportunities (Frey and Osborne, 2017) given the capital-intensive nature of the manufacturing process? 30 | Multinational Business/ Cristina Popescu Trends in manufacturing How will host and home country governments react, and what policies will they enact to promote/restrict trade and FDI? Are there advantages to being vertically-integrated in the face of the technological changes identified above (Afuah, 2001; Langlois, 2003) and, if so, what should be internalised and what should be externalised? 31 | Multinational Business/ Cristina Popescu Trends in manufacturing Increasing pressure from various stakeholders in the developed and developing economies to adopt sustainable practices - environmentally friendly and socially compatible policies across their entire global networks, including subsidiaries and suppliers - affects not only how and where they produce, but how they recover their waste and manage reverse logistics 32 | Multinational Business/ Cristina Popescu Sustainable manufacturing Companies offshored their activities mainly seeking low cost of work (e.g., Kinkel and Maloca, 2009), often locating plants where environmental and social regulations are lacking or not enforced (Jahns et al., 2006). Sustainable SCND – Supply Chain Network Design (Arampantzi et al., 2016) model that captures three sustainability dimensions in separate objectives: - the cost objective captures major investment and operational supply chain costs - the environmental objective focuses on Green House Gas (GHG) emissions and waste generation - the social objective encompasses key concerns of social performance. 33 | Multinational Business/ Cristina Popescu Ethical issues in manufacturing and offshoring Ethical issues: child labour - Nearly 200 million children are engaged in child labor, many in developing countries that are part of the supply base of global manufacturing networks (Cho, Fang, Tayur & Xu, 2019) - International Labor Organization: “[child labor] not only undermines the roots of human nature and rights but also threatens future social and economic progress worldwide. Trade, competitiveness and economic efficiency should not be a pretext for this abuse.” 34 | Multinational Business/ Cristina Popescu Ethical issues in manufacturing and offshoring The progress to end child labor is challenged by the prevalence of global outsourcing. The global search for cheap labor has boosted the demand for child labor (Acaroglu and Dagdemir, 2010). Moreover, child labor enables local suppliers to keep production costs down. Therefore, many multinational … firms lack motivation to control their local suppliers’ use of child labor. 35 | Multinational Business/ Cristina Popescu Ethical issues in manufacturing and offshoring Approaches to tackle this issue: - internal inspections - difficult as due to small workshops, sometimes in households – too fragmented - spread across multiple countries penalty schemes - outsourcing costs increase … Firms have been encouraged to disclose their policies and efforts in combating child labor to their stakeholders including their employees, supply chain partners and third-party organizations 36 | Multinational Business/ Cristina Popescu Ethical issues in manufacturing and offshoring Obeetee, an Indian carpet manufacturer, increased wages signi… cantly as an incentive to loom owners, while informing them (in writing) that if found employing child labor, they would lose their business and be blacklisted from doing any future business with the company (International Finance Corporation 2002). Similarly, Bayer CropScience put 5% of its procurement price as a bonus for crop farmers who did not use childlabor (Subramanian 2013). 37 | Multinational Business/ Cristina Popescu Sustainalibility in production E-vehicles: one source of EV emissions is the creation of their large lithium- ion batteries. The use of minerals including lithium, cobalt, and nickel, which are crucial for modern EV batteries, requires using fossil fuels to mine those materials and heat them to high temperatures. As a result, building the 80 kWh lithium-ion battery found in a Tesla Model 3 creates between 2.5 and 16 metric tons of CO2 (exactly how much depends greatly on what energy source is used to do the heating). This intensive battery manufacturing means that building a new EV can produce around 80% more emissions than building a comparable gas-powered car. (MIT Climate Portal, 2022) 38 | Multinational Business/ Cristina Popescu Sustainalibility in production E-vehicles: - the major source of EV emissions is the energy used to charge their batteries (MIT Climate Portal, 2022) - gasoline cars emit more than 350 grams of CO2 per mile driven over their lifetimes - a fully electric vehicle emits about 25 percent less carbon than a comparable hybrid car - life span of an EV vs hybrid vs gasoline car - waste disposal for EV batteries while internal combustion engines are getting more efficient, EVs are poised to become greener by leaps and bounds as more countries add more clean energy to their mix 39 | Multinational Business/ Cristina Popescu Strategic alliances with suppliers Sometimes, firms can capture the benefits of vertical integration without the associated organizational problems by forming long- term strategic alliances with key suppliers. However, these commitments may actually limit strategic flexibility. 54 | Multinational Business/ Cristina Popescu The role of just-in-time inventory The basic philosophy behind just-in-time (JIT) systems is to economize on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process, and not before. JIT systems generate major cost savings from reduced warehousing and inventory holding costs. JIT systems can help the firm spot defective parts and take them out of the manufacturing process to boost product quality. But a JIT system leaves the firm with no buffer stock of inventory to meet unexpected demand or supply changes. 55 | Multinational Business/ Cristina Popescu  School of Business and Economics Department of International Business Marketing Globally Cristina Popescu International marketing blunders 2 | International Business / Cristina Popescu What is marketing Marketing is the management process responsible for identifying, anticipating, and satisfying customer requirements profitably. Chartered Institute of Marketing 3 | International Business/ Cristina Popescu Globalization of markets and brands Most experts believe that while there is a trend towards global markets, cultural and economic differences among nations act as a major brake on any trend toward global consumer tastes and preferences. Differences in product and technical standards also limit the ability of firms to sell a standardized product to a global market. 4 | International Business / Cristina Popescu Marketing mix The marketing mix (the choices the firm offers to its targeted market) is comprised of: product attributes the distribution strategy (place) the pricing strategy the communication strategy (promotion) 5 | International Business / Cristina Popescu Market segmentation Market segmentation refers to the identification of distinct groups of consumers whose purchasing behavior differs from others in important ways. Global market segments are more likely to exist in industrial products than in consumer products. Source: japanesemythology.weebly.com 6 | International Business / Cristina Popescu 7 | International Business/ Cristina Popescu Market segmentation Firms must adjust their marketing mix from segment to segment consider the existence of segments that transcend national borders and understand differences across countries in the structure of segments customize the product, the packaging, or the way in which the product is marketed in order to maximize performance in market where there are no cross-national segments 8 | International Business / Cristina Popescu Product attributes Products can be thought of as a bundle of attributes. Products sell well when their attributes match consumer needs Consumer needs vary from country to country depending on - legal considerations and technical standards - culture - economic development So, the ability of firms to sell the same product worldwide is limited. 9 | International Business / Cristina Popescu Product attributes – legal considerations Explicit legal requirements for product alteration concern, for example, labelling requirements (e.g. language, consumer safety etc). 10 | International Business / Cristina Popescu Product attributes - technical standards National differences in product and technological standards force firms to customize the marketing mix. Government mandated product standards can make mass production difficult. Idiosyncratic decisions made in the past on technical standards can influence future marketing strategies. Source: completeelectrical.biz 11 | International Business / Cristina Popescu Product attributes - cultural differences Countries differ along cultural and societal dimensions including  tradition  language  religion While there is some evidence that tastes and preferences are becoming more cosmopolitan, a “global culture” is still a long way off. 12 | International Business / Cristina Popescu Cultural differences – McDonald‘s 13 | International Business/ Cristina Popescu Product attributes - economic development Consumers in highly developed countries tend to demand a lot of extra performance attributes into their products. Consumers in less developed nations tend to prefer more basic products. 14 | International Business / Cristina Popescu Distribution (place) - differences between countries The main differences between distribution systems are retail concentration channel length channel exclusivity channel quality Source: monopolycargo.com 15 | International Business / Cristina Popescu Distribution strategy Producer Wholesaler Retailer Consumer Producer Retailer Consumer Producer Wholesaler Consumer Producer Consumer 16 | International Business / Cristina Popescu Distribution - differences between countries 1. Retail Concentration In some countries the retail system is very concentrated, while in other countries it is fragmented. In a concentrated system, a few retailers supply most of the market. In a fragmented system there are many retailers, none of which has a major share of the market. Sources: wikipedia.com alivsworld.wordpress.com 17 | International Business / Cristina Popescu Distribution - differences between countries 2. Channel Length Channel length refers to the number of intermediaries between the producer and the consumer. Fragmented retail systems tend to have longer channels. 18 | International Business / Cristina Popescu Distribution - differences between countries 3. Channel Exclusivity An exclusive distribution channel is one that is difficult for outsiders to access. Japan's system is an example of a very exclusive system. 19 | International Business / Cristina Popescu Distribution - differences between countries 4. Channel Quality Channel quality refers to the expertise, competencies, and skills of established retailers in a nation, and their ability to sell and support the products of international businesses. The quality of retailers is good in most developed countries, but is variable at best in emerging markets and less developed countries. A poor quality channel can impede market entry. 20 | International Business / Cristina Popescu Choosing a distribution strategy The choice depends on the relative costs and benefits of each alternative. Each intermediary adds its own markup to the products, there is a link between channel length and profit margin. If price is important, a shorter channel is better. If a retail sector is very fragmented, a long channel is better. 21 | International Business / Cristina Popescu Pricing strategy Firms must consider price discrimination, strategic pricing, government-mandated price controls. 22 | International Business / Cristina Popescu Pricing strategy The price elasticity of demand is a measure of the responsiveness of demand to changes in price. Demand is elastic when a small change in price produces a large change in demand. Demand is inelastic when a large change in price produces only a small change in demand. Elasticity of demand is determined by  income level  competitive conditions Price elasticities tend to be greater in countries with lower income levels and greater numbers of competitors. 23 | International Business / Cristina Popescu Configuring the marketing mix Standardization versus customization is not an all or nothing concept. Most firms standardize some things and customize others. Decisions about what to standardize and what to customize should be made after exploring the costs and benefits of each option. 25 | International Business / Cristina Popescu Promotion strategy Through promotion the firm intends to sell a product or service. The types of messages and their presentation method depend on the company itself, the product, the country of operation. Attention Interest Desire Action 26 | International Business / Cristina Popescu International promotion Have you ever experienced/seen a promotion/advertisement from another country which you found strange/would not work in your home country? 27 | International Business/ Cristina Popescu Promotion - barriers to international marketing communication International communication occurs whenever a firm uses a marketing message to sell its products in another country. The effectiveness of a firm's international communication can be influenced by - cultural barriers - source and country of origin effects - noise levels - legal requirements 28 | International Business / Cristina Popescu Promotion - push versus pull strategies Firms must choose between a push strategy (emphasizes personal selling) and a pull strategy (emphasizes mass media advertising) The choice between the strategies depends upon - product type and consumer sophistication - channel length - media availability. 29 | International Business / Cristina Popescu Promotion - push versus pull strategies 1. Product Type and Consumer Sophistication Consumer goods firms trying to sell to a large segment of the market tend to prefer a pull strategy. Industrial products firms or makers of other complex products favor a push strategy. 30 | International Business / Cristina Popescu Promotion - push versus pull strategies 2. Channel Length The longer the channel, the more intermediaries are involved. It can be expensive to use direct selling to push a product through many layers of a distribution channel. A firm may try to pull its product through the channels by using mass advertising to create consumer demand. 31 | International Business / Cristina Popescu Promotion - push versus pull strategies 3. Media Availability A pull strategy relies on access to advertising media. A push strategy is more attractive when there is limited access to mass media. 32 | International Business / Cristina Popescu Promotion – social media The use of social media depends on: - The targeted group - Legislation Benefits of using social media: - Coverage - Instant feedback Drawbacks of using social media: - Too much negative feedback 33 | International Business / Cristina Popescu 34 | International Business/ Cristina Popescu Promotion – social media Source: pr-ip.de 35 | Multinational Business / Cristina Popescu Promotion – social media Source: http://www.thueban.de/wp- content/uploads/2013/09/priiil.jpg 36 | Multinational Business / Cristina Popescu Global advertising Haagen Dazs Gelato Stracciatella TV Commercial, 'Arguments' (youtube.com) Was macht Häagen Dazs zu Häagen Dazs? Trailer Deutsch (youtube.com) Häagen-Dazs commercial with Bradley Cooper (youtube.com) 37 | Multinational Business / Cristina Popescu  School of Business and Economics Department of International Business The organization of international business Cristina Popescu Challenges of organizing international business Managers need to find solutions to certain structural issues: - coordinating activities from multiple foreign markets - control activities from multiple foreign markets - reward activities from multiple foreign markets balance between global standards and local circumstances Being able to answer the questions: who did what job who made which decision who worked in which unit who reported to whom who told whom what to do 2 International Business | Cristina Popescu Organizational structures Designing and implementing an organizational structure means determining the ideal structure which could sustain a MNE‘s strategy – structure follows strategy - e.g. global integration or local adaptation? Decision of: - vertical differentiation: who has which authority to make which decision centralization vs decentralization globality - horizontal differentiation: which people in which units fulfill which tasks 3 International Business | Cristina Popescu The functional structure Arranging the company by business functions Suitable for companies with a narrow range of products/services Supports an efficient streamlining of decision marking Limits the development of cross-functional knowledge generating and decision-making due to its highly bureaucratic characteristic 4 International Business | Cristina Popescu The functional structure HQ Production Marketing NA Europe NA Europe 5 International Business | Cristina Popescu The divisional structures Specify roles according to products or markets Multiple options: International division – when global operations represent a small percentage of total operations creating a separate, stand-alone division only responsible for overseas operations limitations: creates „us vs them“ tensions Worldwide product division – most used by MNEs MNEs make and sell a wide range of similar products limits: coordination problems can create inefficiencies Worldwide area divison – using geographic divisions, when sales are not dominated by a single country or region distribution of activities across multiple markets limits: replication of efforts 6 International Business | Cristina Popescu The international division structure HQ Domestic Domestic International division A division B division Subsidiary Subsidiary Subsidiary China India EU 7 International Business | Cristina Popescu The worldwide product division structure HQ Worldwide Worldwide product product division A division B NA EU Asia NA EU Asia 8 International Business | Cristina Popescu The worldwide area division structure HQ Area Middle Area South Area EU Area Asia East America 9 International Business | Cristina Popescu The global matrix structure MNEs implementing a transnational strategy (global integration + local responsiveness) opt for a global matrix structure differentiating along two dimensions implementing decision-making from multiple perspectives employees have two supervisors limits: gamesmanship 10 International Business | Cristina Popescu Boundaryless companies Characteristics: flatter organizational formats same access to information and rewards egalitarian workplace – avoidance of charts, chains of command self-organizing teams reciprocal evaluation entrepeneurial mindset vs risk-averse bureaucrats 12 International Business | Cristina Popescu The network structure Characteristics: allocation of people and resources to decentralized projects „do what you do best and outsource the rest“ coordination is supported by latest communication technology developments cross-partner linkages - similarity with keiretsu networks suppliers distribution Core design firm marketing 13 International Business | Cristina Popescu The virtual organization Characteristics: work across time and space, and organisational boundaries with links strenghtened by webs of communication technologies use of alliances, agreements, and associations deemphasizing formal rules, responsibilities and procedures disregards hierarchical boundaries employees are free agents who can move from project to project and apply best their skills 14 International Business | Cristina Popescu Organizational structures and innovation How do different organizational structures (e.g., hierarchical, flat, matrix) influence a company's ability to innovate? How should a company’s organizational structure adapt during periods of rapid change or crisis (e.g., economic downturns, technological disruptions)? 15 Pitfalls of neoclassical structures Organizing structures which constantly evolve and change is challenging Neoclassical structures are socially complex Issue of appropriate leadership within teams Challenge with measuring individual productivity Hidden hierarchies can arise 16 International Business | Cristina Popescu Coordination systems Coordination by standardization: standardization of strategic (e.g.decision making about entering new markets) and mundane aspects (e.g. dress code) leaves little leeway for deviations reduction of cultural influences at the workplace difficult to implement Coordination by plan application of schedules, sequences and processes regulation of how units adopt, accept, adjust practices flexibility in adjusting goals and schedules as long as targets are met TQM, Sig Sigma, Balanced Scorecard are used to improve planning processes adjusting schedules and objectives can be challenging Coordination by mutual adjustment promoting collaboration, cultivating relationships supports exchanging ideas coordination by mutual adjustment logistical obstacles in implementation 17 International Business | Cristina Popescu Organizational cultures Significant link between a MNE‘s culture and its strategic success values, principles, work climate, ethical standards A successful organizational culture creates engagement and enthusiasm beyond the standard economic rewards identify with the company‘s vision How to create a suitable organizational culture? 18 International Business | Cristina Popescu Control activities Types of control activities: output – objectives, measurement of objectives process – operational activities social – embedded organizational values International JV: output and process control with minority equity restriction process control if the company receives governmental incentives (financial) social control when companies are obliged to partner up with SOE (Chen, D., Paik, Y., & Park, S. H. (2010). Host-country policies and MNE management control in IJVs: Evidence from China. Journal of international business studies, 41, 526-537) 19 International Business | Cristina Popescu Reward systems Kerrin, M., & Oliver, N. (2002). Collective and individual improvement activities: the role of reward systems. Personnel review, 31(3), 320-337. 20 International Business | Cristina Popescu Reward systems Cacioppe, R. (1999). Using team– individual reward and recognition strategies to drive organizational success. Leadership & Organization Development Journal, 20(6), 322- 331. 21 International Business | Cristina Popescu Reward systems Importance of reward systems: increase of company loyalty increase of corporate identity improvement of performance (dependent on recipient) 22 International Business | Cristina Popescu Reward systems Challenges: defining effectiveness identifying the rewards which motivate employees to contribute with new ideas, improvements, or engage more in teamwork „Whose idea is it anyway?“ (for teams with a high level of interdepence between members) evolution of reward systems (e.g. due to generational differences) international M&As, IJVs Holding back until an idea is „mature“ „banking“ ideas (holding them up within the team but presenting them individually to supervisors to receive individual financial reward) 23 International Business | Cristina Popescu Reward systems Key points in implementing reward systems: have clear strategic purpose for teams and rewards communicate about the rewards and the team results plan the type, criteria and use of rewards and recognition have financial measures and stretch objectives include training in interpersonal and teamwork skills evaluate and review the reward system 24 International Business | Cristina Popescu Reward systems Team level vs individual level: stages of team life cycle reward and recognition categories type of teams public, private or not-for-profit sector culture of the team and organisation 25 International Business | Cristina Popescu Reward systems Team level vs individual level – key questions : What key results and behaviours do we want to achieve that we are not achieving now? What team rewards will best motivate people to achieve these results and behave in these ways? What are the indicators of team and individual success? How and when will we measure and report progress and final results? What is the best way to celebrate success? What do we estimate each of the reward schemes will cost and what is the total cost of the reward program? How will we pay for this? Are there aspects of fairness, group norms, and cultural differences that need to be considered? How do we handle an individual, teams or the organisation when it does not meet its targets and there is no reward? 26 International Business | Cristina Popescu Reward systems Organizational cultural values to consider upon implementing reward systems: Cacioppe, R. (1999). Using team– individual reward and recognition strategies to drive organizational success. Leadership & Organization Development Journal, 20(6), 322-331. 27 International Business | Cristina Popescu  School of Business and Economics Department of International Business Evaluation of countries for operations Cristina Popescu Market entry decisions Firms entering foreign markets make three basic decisions: which markets to enter when to enter those markets how to enter those markets Depends also on: - types of operations meant to be re-localized (e.g. production, sales, administrative, R&D etc) - sequence of internationalization (e.g. step by step – see Uppsala model) - depth of investment (e.g. exporting vs JVs vs acquisitions) Product offering also plays a role: services tend to remain close to the end consumer vs steel/auto where exporting is a viable option 2 | International Business/ Cristina Popescu Which foreign markets to enter When deciding which foreign markets to enter, companies examine three important aspects: Physical factors of a country (e.g. a country‘s geography or demography) Social factors of a country (e.g. politics, law, culture and economy) Competitive factors of a country (e.g. suppliers, rival firms) 3 | International Business/ Cristina Popescu Which foreign markets to enter Absatzchancen, geografische Nähe, kulturelle und rechtliche Rahmenbedingungen – eine Vielzahl von Faktoren entscheidet darüber, auf welchen internationalen Märkten ein Unternehmen aktiv ist oder in naher Zukunft sein wird. Sales chances, geographical proximity, the cultural and legal framework – a multitude of factors play a role in a company‘s presence or future presence on an international market. IfM Bonn 1/ 2015 4 | International Business/ Cristina Popescu Which foreign markets to enter – physical factors It can help managers decide whether or not to invest in a country with a high chance of natural disasters and adverse climatic conditions (e.g. hurricanes, floods, droughts, earthquakes, tsunamis) Knowledge in demography can be helpful in idenfying the potential needs of the customers or trying to foresee the evolution of their preferences. 5 | International Business/ Cristina Popescu Source: destatis.de Which foreign markets to enter – social factors Politics influence whether and how foreign companies can operate within its borders. Laws and regulations and the way they are enforced in a country determine how foreign companies operate. Understanding a country‘s culture can help managers make better operational decisions abroad (e.g. existence of cultural subsegments). Knowledge in economics help managers identify countries with the lower costs or a favourable currency. e.g. GDP/capita can only tell you this much – look also at the Gini index 7 | International Business/ Cristina Popescu 9 Food regulation in the EU vs the US The keyword for European food regulation right now is the “precautionary principle.” In practice, it determines that “when there is uncertainty about specific risks but you don’t have all the data, nonetheless you have the authority to address those risks.” As such, the Commission can “regulate, restrict, and ultimately ban a food” if the “risk of damage to the population is too big to wait for more data.” This approach has received criticism by American legal scholars, who argue that it is “too vague for a guiding principle” and that it “runs the risk of killing innovation.” Source:https://europeanstudies.macmillan.yale.edu 10 International Business/ Cristina Popescu Which foreign markets to enter – legislation and politics 11 | International Business/ Cristina Popescu Which foreign markets to enter – social factors Obsolence and leapfrogging: consumers in emerging markets can have a different consumer behaviour than those from developed markets (e.g. Chinese consumers skipping the landlines and going from phoneless to cell phones) Substitution (e.g. Diesel vs gasoline) Trading blocs: enter a small country which is part of a trading bloc to gain access to the other partner markets 12 International Business/ Cristina Popescu Which foreign markets to enter – social factors Labour – labour market size, min. wage, benefits, education levels, unemployment rates Infrastructure – impact on commuting, communication (e.g. with suppliers and consumers), delivery and transportation of goods Governmental incentives - lower taxes, low interest governmental loans, tariff exception, legal tranparency, law enforcement, corruption 13 International Business/ Cristina Popescu Which foreign markets to enter – social factors Foreign exchange risk (FX risk) – the change of the foreign country‘s currency is double edged sword, depending on your goal of internationalization (sales or resources) 14 International Business/ Cristina Popescu Which foreign markets to enter – competitive factors The larger the market a company enters, the more competitors it has to face. Also, market share and brand recognition influence the relations with suppliers and distributors. Liability of foreignness going first to similar countries Following big competitors agglomeration 17 | International Business/ Cristina Popescu Scanning vs detailied analysis Scanning - use of inexpensive, available information - yes/no questions, statistics, indicators (e.g. of potential sales), qualitative assessment (e.g. potential political evolution) - first step is to determine to „no go“ conditions Detailed analysis - after narrowing down countries - escalation of commitment - the more time managers invest in examining alternatives, the more likely they are to accept them 18 | International Business/ Cristina Popescu When to enter a foreign market Once attractive markets are identified, the firm must consider the timing of entry. First mover advantages are the advantages associated with entering a market early. First mover advantages include the ability to pre-empt rivals and capture demand by establishing a strong brand name. 19 | International Business/ Cristina Popescu When to enter a foreign market First mover disadvantages are disadvantages associated with entering a foreign market before other international businesses. First mover disadvantages include pioneering costs. Pioneering costs arise when the foreign business system is so different from that in a firm’s home market that the firm must devote considerable time, effort and expense to learning the rules of the game. 20 | International Business/ Cristina Popescu Entry modes in a foreign market Entry modes include: - exporting - licensing or franchising to a company in the host nation - establishing a joint venture with a local company - wholly owned subsidiary 21 | International Business/ Cristina Popescu Entry modes in a foreign market - exporting Exporting refers generally to merchandise sent out of a country. Exporting is attractive because: - it avoids the costs of establishing local manufacturing operations Exporting is unattractive because: - high tariffs can make it uneconomical - agents in a foreign country may not act in exporter’s best interest 22 | International Business/ Cristina Popescu Entry modes in a foreign market - licensing A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified time period, and in return, the licensor receives a royalty fee from the licensee. Licensing is attractive because: - the firm does not have to bear the development costs and risks associated with opening a foreign market Licensing is unattractive because: - the firm doesn’t have the tight control over manufacturing, marketing and strategy 23 | International Business/ Cristina Popescu Entry modes in a foreign country - franchising Franchising is basically a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business. Franchising is attractive because: - firms avoid many costs and risks of opening up a foreign market Franchising is unattractive because: - the geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect 24 | International Business/ Cristina Popescu Entry modes in a foreign country – joint venture A joint venture is the establishment of a firm that is jointly owned by two or more otherwise independent firms. Joint ventures are attractive because: - they allow the firm to benefit from a local partner's experience and the costs and risks of opening a foreign market are shared with the partner - when political considerations make joint ventures the only feasible entry mode Joint ventures are unattractive because: - the firm risks giving control of its technology to its partner - shared ownership can lead to conflicts and battles for control if goals are different 25 | International Business/ Cristina Popescu Entry modes in a foreign country – wholly owned subsidiary Firms can establish a wholly owned subsidiary in a foreign market: - setting up a new operation in the host country - acquiring an established firm in the host country Wholly owned subsidiaries are attractive because: - they reduce the risk of losing control over core competencies - they give a firm the tight control over operations in different countries Wholly owned subsidiaries are unattractive because: - the firm bears the full cost and risk of setting up overseas operations 26 | International Business/ Cristina Popescu Risks How risktaking is the CEO? One man‘s risk is another man‘s opportunity (e.g. security companies) Political change Foreign exchange risk – exporting abroad or producting abroad Natural disasters – e.g. 2011 tsunami Pandemics - COVID-19 27 | International Business/ Cristina Popescu Analyzing Assign each Assign each Multiply the country a aspect a weight with Compare „grade“ for a weight the „grade“ each aspect Do not forget to exclude those countries from the beginning on which fulfill the „no go“ conditions 28 | International Business/ Cristina Popescu  School of Business and Economics Department of International Business Strategies for International Business Cristina Popescu Recap from previous lectures 2  Porter‘s three generic strategies Cost Low High Cost Broad leadership Differentiation Scope Narrow Focus 3 Porter‘s three generic strategies – Cost leadership – Firm‘s theory about how to compete successfully centers on low costs and low prices – Same value of product for a lower price – Target average customers for mass market - little differentiation – Key functional areas are manufacturing and materials management – High volume, low margin approach – Relentless drive to cut costs might compromise value that customers desire 4 Porter‘s three generic strategies - Differentiation – Deliver products that customers perceive to be valuable and different – Target customers in smaller, well-defined segments who are willing to pay premium prices – Low volume, high margin approach – Must have unique attributes (actual or perceived) - quality, sophistication, prestige, or luxury – Challenge: identify attributes that are valued by customers in each market segment 5 Porter‘s three generic strategies - Differentiation When pursuing the differentiation strategy, companies can choose between two types of differentiation: Tangible differentiation - observable product characteristics: size, color, materials, etc. performance complementary services Intangible differentiation - unobservable and subjective characteristics that appeal to customer’s image, status, identity, and desire for exclusivity 6 Porter‘s three generic strategies - focus – A company that pursues the focus strategy serves the needs of a particular segment or niche of an industry such as a geographical market type of customer product line. – Focusing may be successful when a firm possesses intimate knowledge about a particular segment. – Example: Intelligentsia Coffee 7 Exercise Identify a market gap in Tübingen. Please work in pairs of 2 or 3 and come up with a cost leadership/ differentiation/ focus strategy: - Which industry - What product - Who are your target customers - Who is your potential competition - Where can you find potential collaborations Time: 15 minutes 8 Local adaptation vs lower cost Pressure to lower cost Global standardization Transnational Home replication Multidomestic/ Localization Pressure to adapt locally 9  Mochi ice cream Gelato - Italy - Japan Halva ice cream - Israel Faloodeh - Iran Cheese ice Spaghettieis - cream - Germany Philippines 10 Home replication strategy Duplication of home country-based competencies in foreign countries Service - franchising/licensing, products - exporting Role of overseas operations: performed by independent distributors or licencees/ franchisees Flow of knowledge: knowledge developed and retained domestically 11 Multidomestic/ Localization strategy Countries/regions are regarded as stand-alone markets Role of overseas operations: countries/regions are regarded as stand-alone markets Flow of knowledge: Knowledge developed and retained within each unit 12 Global standardization strategy Development and distribution of standardized products worldwide Centers of excellence Role of overseas operations: mostly implementing parent company strategy, some as centers of excellence Flow of knowledge: Knowledge developed at headquarters or in centers of excellence 13 Transnational strategy Locally responsive and cost efficent Global learning and diffusion of knowledge Role of overaseas operations: Differentiated contributions by national units to integrated worldwide operations Flow of knowledge: Knowledge developed jointly and shared worldwide 14 Advantages and disadvantages of the four strategic choices Strategy Advantages Disadvantages Leverages home country- Home replication May result in foreign customer based advantages alienation Relatively easy to implement High costs due to duplication Multidomestic/ Maximizes local of efforts in multiple countries Localization responsiveness Too much local autonomy Leverages low-cost Global advantages Too much centralized control standardization Captures scale economies Cost-efficient while being Transnational locally responsive Organizationally complex Engages in global learning Difficult to implement and diffusion of innovations 15 Internationalization theories The Uppsala Model: - developed in 1977 - establishment chain- firms begin their international operations by exporting; as sales grew, they replaced their agents with their own sales organization, and as growth continued they began manufacturing in the foreign market - companies would start their internationalization often in neighbouring countries – a phenomenon linked to the liability of foreignness 16 Internationalization theories The Uppsala Model: - declining validity: companies sometimes leapfrog over stages in the establishment chain companies start to internationalize soon after their starting the internationalization process proceeds more rapidly now the order in which companies enter foreign markets no longer correlates with psychic distance joint ventures, strategic alliances, acquisitions are modes that are much more commonly used today 17 Internationalization theories The Born Global Model: - developed in 1994 - a business organisation that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries - management views the world as their market place from the outset - began exporting, on average, only 2 -3 years after foundation 18 Internationalization theories The Born Global Model: - Phase 1: limited resources and an underdeveloped organisational structure dependance on unique and often tacit knowhow to sustain their advantage Their unique skills combined with entrepreneurship are the basic human resources that lead to the development of unique products with global market potential. successful accelerated internationalisation requires a level of financing and international business expertise that these entrepreneurs seldom possess building a channel/network and tries to establish relations with potential customers 19 Internationalization theories The Born Global Model: - Phase 2: The first one is the potential to become a global industry (interdependence between the markets and a relatively limited number of major players that leverage this interconnectedness) The second is the extent of the firm’s preparedness for globalisation, which is dependent on the types of products/services and on the organisational learning and resources. 20 Internationalization theories The Born Global Model: - Phase 3: to what extent should it give-up its independence and become a small satellite in the network of the global player? illustrated by the case of the Italian firm Mary Short Tricot, which started out by producing cashmere clothes for leading global brands in the luxury apparel industry. Gradually this BG developed superior technological and marketing skills. They decided to launch their own brand and established cooperation with an important Italian designer. However, they continued to produce as sub- contractors for their leading global brand customers 21 Current developments Classical theories of how to do business need to be adapted to consumer developments - sustainability - digitalization - AI - migration - focus on SDGs (sustainable development goals of the UN) … 22 Recent research Aschemann-Witzel, J., Randers, L., & Pedersen, S. (2022). Retail or consumer responsibility?—Reflections on food waste and food prices among deal-prone consumers and market actors. Business Strategy and the Environment. Supermarkets have been criticized by nongovernmental organizations (NGOs) for pricing tactics that trigger overpurchase, which may subsequently lead to food waste. Some retailers have responded by abolishing price promotions. However, is it the macro-level of the market structure, or the micro-level of the consumer, that is to blame for food waste? …Findings highlight that responsibilization is not either on the consumers or retailers' side and can expand for both…For businesses, our results imply that abolishing price promotions does not align with consumer's ascription of responsibility. In turn, actions that involve collaborations of actors, including consumers, speak much more to the perception of responsibility expansion. 23 Recent research Petersen, J. A., Paulich, B. J., Khodakarami, F., Spyropoulou, S., & Kumar, V. (2022). Customer-based execution strategy in a global digital economy. International Journal of Research in Marketing, 39(2), 566-582. The growth in digitalization and applications of new-age technologies to assist business processes, accompanied by fluctuations in the global business environment, have had a considerable impact on the success of MNCs across markets in recent years…issues of customer engagement (e.g., the role of gifting through Amazon e-cards and how it influences both the giver and the recipient in terms of future buying behavior), digitalization (e.g., how Artificial Intelligence can help personalize messages and customize product offerings), and the ever-changing global environment (e.g., how the instant spread of information across the world helps to reach out to customers worldwide through direct selling). 24 Recent research Hatzigeorgiou, A., & Lodefalk, M. (2021). A literature review of the nexus between migration and internationalization. The Journal of International Trade & Economic Development, 30(3), 319- 340. …migrants’ educational attainment and company position matter for the capacity of migration to act as a facilitator of internationalization. The fact that skills seem to enhance the enabling role of migrants in internationalization can be viewed as support for the theoretical proposition that migrants provide knowledge and contacts that reduce information friction in international business. 25 Recent research DasGupta, R., Kumar, S., & Pathak, R. (2022). Multinational enterprises’ internationalization and adoption of sustainable development goals. International Journal of Managerial Finance. This study shows that MNEs’ internationalization is associated with their higher engagement in SDGs. This is owing to the pressures MNEs face from diverse stakeholders coupled with the need to build local legitimacy to overcome the liability of foreignness… 26  School of Business and Economics Department of International Business Cross-National Cooperation and Agreements Introduction Regional economic integration covers agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other. In theory, regional economic integration benefits all members. Over the last two decades, the number of regional trade agreements has been on the rise. 2 | International Business / Cristina Popescu Introduction While regional trade agreements are designed to promote free trade, there is some concern that the world is moving toward a situation in which a number of regional trade blocks compete against each other. If this scenario materializes, the gains from free trade within blocs could be offset by a decline in trade between blocs. 3 | International Business / Cristina Popescu Intra EU-27 exports ( EUR mil.) 4 | International Business/ Cristina Popescu 5 | International Business/ Cristina Popescu 6 | International Business/ Cristina Popescu Levels of economic integration There are five levels of economic integration: 1. In a free trade area all barriers to the trade of goods and services among member countries are removed, but members determine their own trade policies with regard to nonmembers. Examples include the European Free Trade Association (between Norway, Iceland, Liechtenstein, and Switzerland) the North American Free Trade Agreement (between the U.S., Canada, and Mexico) – now under a new name: USMCA RCEP (Australia, China, Japan, Laos, Vietnam, South Korea ….) 7 | International Business / Cristina Popescu  Some differences USMCA – NAFTA - Expands U.S. access to Canada’s dairy market - Includes a modernized chapter on sanitary measures - Includes cooperation on agricultural biotechnology which includes rules – for the first time in a U.S. trade agreement – to address all biotechnologies, including new technologies such as gene editing, to support 21st century innovations in agriculture. - Commitments to liberalize financial services markets Source: https://www.trade.gov/usmca-vsnafta 8 | International Business / Cristina Popescu 9 | International Business / Cristina Popescu RCEP – Regional comprehensive economic partnership Source: faz.net, 2021 11 | International Business/ Cristina Popescu RCEP – Regional comprehensive economic partnership Source: Handelsblatt 12 | International Business/ Cristina Popescu RCEP – Regional comprehensive economic partnership 13 | International Business/ Cristina Popescu Levels of economic integration 2. A customs union eliminates trade barriers between member countries and adopts a common external trade policy. Most countries that enter a customs union desire further integration in the future. Examples include the Andean Community (between Bolivia, Colombia, Ecuador, and Peru) 14 | International Business / Cristina Popescu Andean Community This study assessed the role that intra- and extra-regional agreements play in the CAN's trade flows with its main trading partners in the period of 2000-2017. The results show that, overall, the CAN's intra-regional trade agreements have not had a significant influence on trade flows for the period studied…Evidence of the relevance of geographical distance for trade flows implies a need for greater investment in infrastructure that would allow for greater intra-regional interconnection and with other countries in the region. Likewise, the importance of the economies’ size as another important determinant of their trade flows is made evident. Source: Fairlie, A., Collantes, E., & Castillo, L. (2021). The role of intra-and extra-regional agreements in trade flows: the case of the Andean Community of Nations. Problemas del desarrollo, 52(204), 165-188. 15 | International Business/ Cristina Popescu Andean Community https://www.comunidadandina.org/DocOficialesFiles/DEstadistico s/SGDE972.pdf 16 | International Business/ Cristina Popescu Levels of economic integration 3. In a common market no barriers to trade between member countries. Member stated adopt a common external trade policy and guarantee the free movement of the factors of production. This can be difficult to achieve and requires significant harmony among members in employment policies. Examples include The MERCOSUR states (Brazil, Argentina, Paraguay, Venezuela and Uruguay) hope to achieve this status. 17 | International Business / Cristina Popescu Mit dem Antritt des Rechtspopulisten Jair Bolsonaro in Brasilien und dem Links-Mitte Peronisten Alberto Fernández in Argentinien herrscht diplomatische Eiszeit im Mercosur…Das lähmt die Gemeinschaft, die auf den politischen Willen ihrer Regierungen angewiesen ist, weil die Institutionen fehlen. Wie es weiter geht ist unklar. Brasilien, Uruguay und Paraguay wollen Zölle senken. Uruguay und vielleicht auch bald Paraguay wollen ein Abkommen mit China abschließen, Brasilien würde sich gerne mit den USA zusammenschließen. Argentinien will dagegen seine Industrie schützen und sich an keinen weiteren Freihandelsabkommen mehr beteiligen. Source: Deutsche Welle. 2021 Source: Tagesschau, 2021 Source: Handelsblatt, June 2022 18 | International Business / Cristina Popescu 19 | International Business / Cristina Popescu 20 | International Business / Cristina Popescu Levels of economic integration 4. An economic union involves the free flow of products and factors of production between members, the adoption of a common external trade policy, and in addition a common currency, harmonization of the member countries’ tax rates, and a common monetary and fiscal policy. It involves sacrificing a significant amount of national sovereignty. Examples include the European Union (EU) 21 | International Business / Cristina Popescu Levels of economic integration 5. In a political union independent states are combined into a single union. This requires that a central political apparatus coordinates the economic, social, and foreign policy for member states. 23 | International Business / Cristina Popescu Sample exam question In a _______, all barriers to the free flow of goods and services between member countries are removed, and a common policy towards nonmembers is established. Free trade area Customs union Common market Economic union 24 | International Business / Cristina Popescu Sample exam question In a _______, all barriers to the free flow of goods and services between member countries are removed, and a common policy towards nonmembers is established. Free trade area Customs union Common market Economic union By contrast to a free trade area, a customs union adds the common trade policy towards non-members. 25 | International Business / Cristina Popescu The economic case for integration Regional economic integration is an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under international agreements such as the WTO. Since it is easier to form an agreement with a few countries than across all nations, there has been a push toward regional economic integration. 26 | International Business / Cristina Popescu The political case for integration Politically, integration is attractive because by linking countries together, making them more dependent on each other, and forming a structure where they regularly have to interact, the likelihood of violent conflict and war will decrease. by linking countries together, they have greater influence and are politically much stronger in dealing with other nations. 27 | International Business / Cristina Popescu Evolution of the European Union The European Union (EU) is the result of the devastation of two world wars on Western Europe and the desire for a lasting peace and the desire by the European nations to hold their importance on the world’s political and economic stage. The forerunner of the EU was the European Coal and Steel Community (formed in 1951). The Treaty of Rome established the European Economic Community in 1957. The name was changed to the EU in 1994. 28 | International Business / Cristina Popescu The establishment of the Euro The Maastricht Treaty (1992) committed EU members to adopt a single currency, the Euro. The Euro is used by 20 of the 27 member states. Countries that participate have agreed to give up control of their monetary policy. 29 | International Business / Cristina Popescu 30 | International Business / Cristina Popescu Benefits of the Euro It is less costly to handle one currency, rather than many. It is easier to compare prices across Europe. Increased competition across Europe promotes greater efficiencies in production. 31 | International Business / Cristina Popescu Costs of the Euro Membership in the common currency implies a loss of control over monetary policy. The European Central Bank (ECB) was established to manage monetary policy, but some question its ability to act independently. The EU is not an optimal currency area - an area where similarities in the underlying structure of economic activities make it feasible to adopt a single currency and use a single exchange rate as an instrument of macro-economic policy. 32 | International Business / Cristina Popescu The Euro Crisis 35 | International Business / Cristina Popescu The Euro crisis 36 | International Business / Cristina Popescu  School of Business and Economics Department of International Business Governmental influence on trade B390 International Business Dr. Cristina Popescu  B390 International Business GOVERNMENTAL INFLUENCE ON TRADE Free trade Free trade refers to a situation where a government does not attempt to restrict what its citizens can buy from another country or what they can sell to another country While many nations are nominally committed to free trade, they tend to intervene in international trade to protect the interests of politically important groups. 2 | Department of International Business / Cristina Popescu Free trade - benefits Economists generally agree on the fact that trade is beneficial: - trade creation – switching from high-cost producers to lower-cost ones - economies of scale - increased competition - make better use of raw materials or resources (surplus or too little) ‚If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it from them‘ (Adam Smith, The Wealth of Nations) With free trade there will a net welfare gain (David Ricardo, On the Principles of Political Economy and Taxation) 3 | Department of International Business/ Cristina Popescu  B390 International Business GOVERNMENTAL INFLUENCE ON TRADE Instruments of trade policy There are several main instruments of trade policy 1. Tariffs 2. Subsidies 3. Import quotas 4. Voluntary export restraints 5. Local content requirements 6. Administrative policies 4 | Department of International Business / Cristina Popescu  B390 International Business GOVERNMENTAL INFLUENCE ON TRADE Tariffs A tariff is a tax levied on imports that effectively raises the cost of imported products relative to domestic products. Specific tariffs are levied as a fixed charge for each unit of a good imported. Ad valorem tariffs are levied as a proportion of the value of the imported good. 5 | Department of International Business / Cristina Popescu  EU-China EV tariffs: German carmakers fear backlash – DW – 05/27/2024 6 | Department of International Business / Cristina Popescu 7 | Department of International Business / Cristina Popescu  B390 International Business GOVERNMENTAL INFLUENCE ON TRADE Tariffs Who benefits from tariffs and who is disadvantaged? 8 | Department of International Business / Cristina Popescu  B390 International Business GOVERNMENTAL INFLUENCE ON TRADE Subsidies Subsidies are governmental financial support for domestic producers. They help domestic producers in two ways: - They help them compete against low-cost foreign imports. - They help them gain export markets. 9 | Department of International Business / Cristina Popescu 10 | Department of International Business/ Cristina Popescu 11 | Department of International Business/ Cristina Popescu  B390 International Business GOVERNMENTAL INFLUENCE ON TRADE Import quotas and voluntary export restraints Import quotas restrict the quantity of some good that may be imported into a country. Tariff rate quotas are a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota. Voluntary export restraints are quotas on trade imposed by the exporting country, typically at the request of the importing country’s government. 12 | Department of International Business / Cristina Popescu 13 | Department of International Business / Cristina Popescu  B390 International Business GOVERNMENTAL INFLUENCE ON TRADE Local content requirements A local content requirement demands that some specific fraction of a good be produced domestically. It can be formulated in physical terms or in value terms. Local content require