International Business Theories PDF

BUSMHR 2000 Intro to International Business CH 5: Theories of International Trade and Investment Theories of International Trade and Investment  Learning Objectives After completing this chapter you shoul...

BUSMHR 2000 Intro to International Business CH 5: Theories of International Trade and Investment Theories of International Trade and Investment  Learning Objectives After completing this chapter you should be able to: 1) Explain why nations trade. 2) Loading… Learn about how nations can enhance their competitive advantage. 3) Understand how and why firms internationalize. 4) Explain the strategies internationalizing firms use to gain and sustain competitive advantage. ‹#›  Theories of International Trade and Investment Theories of International Trade and Investment  LO 1) Why Do Nations Trade? What is mercantilism? Mercantilism was the main economic system of trade utilized from the 16th to 18th century. Loading… Mercantilist theorists believed that the amount of wealth in the world was static (viewed trade a zero-sum game). European nations took strides to ensure they accumulated as much of this wealth as possible. The goal was to increase a nation's wealth by imposing government regulation (achieve a trade surplus). It was believed national strength could be maximized by limiting imports via tariffs and maximizing exports. ‹#›  LO 1) Why Do Nations Trade? Adam Smith, a Scottish philosopher, wrote the book “An Inquiry into the Nature and Causes of the Wealth of Nations” published in 1776 to upend the mercantilist system of the day. Smith argued countries differ in their ability to produce goods efficiently—a country has an absolute advantage in the production of a product when it is more efficient than any other country  LO 1) Why Do Nations Trade? Comparative Advantage It may be beneficial for two countries to trade as long as one is relatively more efficient at producing a product needed by the other. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. ‹#›  LO 1) Why Do Nations Trade? The law of comparative advantage is popularly attributed to English political economist David Ricardo and his book “Principles of Political Economy and Taxation” in 1817.  LO 1) Why Do Nations Trade? Comparative Advantage Principle Dairy country has absolute advantage in both products, and relatively more efficient at producing milk than beef (10/2) versus (8/4). ‹#›  LO 1) Why Do Nations Trade? Factor Proportions Theory (Heckscher-Ohlin H/O Theory) Showed a country should export products that use relatively abundant factors of production and import goods that use relatively scarce factors of production. The primary work behind the Heckscher-Ohlin model was a 1919 Swedish paper written by Eli Heckscher at the Stockholm School of Economics. His student, Bertil Ohlin, added to it in 1933. ‹#›  LO 1) Why Do Nations Trade? Leontief Paradox In the 1950s, Russian-born economist Wassily Leontief revealed a paradox that seemed to contradict the factor proportions theory. Loading… What accounts for the inconsistency? One explanation is that numerous factors determine the composition of a country’s exports and imports. Another is that, in Leontief’s time, U.S. labor was relatively more productive than labor elsewhere in the world. Perhaps the main contribution of the Leontief paradox is its suggestion that international trade is complex and cannot be fully explained by a single theory! ‹#›  LO 1) Why Do Nations Trade? International Product Life Cycle Theory In a 1966 article, Raymond Vernon sought to explain international trade based on the evolutionary process that occurs in the development and diffusion of products to markets around the world. Each product and its manufacturing technologies go through stages of evolution: introduction, maturity, and standardization. The U.S., for example used to manufacture televisions and now they are manufactured abroad. ‹#›  IPLC Theory International Product Life Cycle (IPLC) Theory ‹#›  LO 1) Why Do Nations Trade? New Trade Theory Developed during the 1970s by economists including the leading academic Paul Krugman (who won the Nobel Prize in 2008 for his contributions). The theory suggests that a critical factor in determining international patterns of trade are substantial economies of scale and network effects that can occur in key industries. For example, specialization of IT in Silicon Valley commenced when Hewlett- Packard (HP) started their computer business there. HP’s success attracted more IT firms to the area and new firms start to get the network benefits of being around each other. ‹#›  Theories of International Trade and Investment Theories of International Trade and Investment  LO 2) How Can Nations Enhance Their Competitive Advantage? How Can Nations Enhance Their Competitive Advantage? National competitive advantage is world leadership in specific industries. Firm-level competitive advantage is superior performance relative to other competitors in the same industry or industry average. ‹#›  LO 2) How Can Nations Enhance Their Competitive Advantage? How Can Nations Enhance Their Competitive Advantage? The more competitive economies today possess a combination of comparative advantages and firm-specific advantages. We conceive national competitiveness as the sum of national comparative advantages and competitive advantage of a nation’s firms collectively. ‹#›  LO 2) How Can Nations Enhance Their Competitive Advantage? Components of National Competitiveness ‹#›  LO 2) How Can Nations Enhance Their Competitive Advantage? Contemporary Theories Three contemporary perspectives help explain the development of national competitive advantage: 1) the competitive advantage of nations, 2) the determinants of national competitiveness, 3) and national industrial policy. ‹#›  LO 2) How Can Nations Enhance Their Competitive Advantage? Competitive Advantage of Nations (Porter) How can nations position themselves in a global race for national competitiveness? An important contribution came from Professor Michael Porter in his 1990 book The Competitive Advantage of Nations. ‹#›  LO 2) How Can Nations Enhance Their Competitive Advantage? Competitive Advantage of Nations (Porter) The competitive advantage of a nation depends on the collective competitive advantages of the nation’s firms. This tends to drive the development of new firms/industries with the same competitive advantage in a virtuous cycle. The advantage results in further innovation and greater productivity. ‹#›  LO 2) How Can Nations Enhance Their Competitive Advantage? Labor Productivity Levels in Selected Countries: GDP Per Hour Worked in U.S. Dollars ‹#›  LO 2) How Can Nations Enhance Their Competitive Advantage? Porter’s Diamond Model A strategic economic model that attempts to explain why one nation-state is more successful than another for a particular industry. According to the model, for an industry to have a national competitive advantage, four determinant factors must be present. ‹#›  Porter’s Diamond of National Competitive Advantage Porter’s Diamond of National Competitive Advantage  LO 2) How Can Nations Enhance Their Competitive Advantage? Porter’s Diamond: Factor Conditions The nation’s resources such as labor, natural resources and advanced factors such as capital, technology, entrepreneurship, advanced workforce skills, and know- how. ‹#›  LO 2) How Can Nations Enhance Their Competitive Advantage? Porter’s Diamond: Demand Conditions Nature of home-market demand for specific products and services. The presence of demanding customers pressures firms to innovate faster and produce better products. For example, an affluent senior population with health issues drives the medical industry in the United States. ‹#›  LO 2) How Can Nations Enhance Their Competitive Advantage? Porter’s Diamond: Competitive Intensity in Focal Industry Companies that face a highly competitive environment at home tend to outperform global competitors that lack such intense domestic competition. The auto industry in Germany is a good example with fierce domestic competition, combined with demanding customers, and the no- speed-limit autobahn. This extremely tough home environment amply prepared Volkswagen (owner of Audi and Porsche), BMW, and Daimler for global competition. ‹#›  LO 2) How Can Nations Enhance Their Competitive Advantage? Porter’s Diamond: Related and Supporting Industries An industrial cluster refers to a concentration of businesses, suppliers, and supporting firms in the same industry located at a particular geographic location. Industrial clusters are characterized by a critical mass of human talent, capital, or other factor endowments. Examples include the fashion industry in northern Italy and consumer electronics in Japan. ‹#›  LO 2) How Can Nations Enhance Their Competitive Advantage? National Industrial Policy Tax Incentives Loading… Monetary and Fiscal Policies Educational Systems Infrastructure Legal and Regulatory ‹#›  LO 2) How Can Nations Enhance Their Competitive Advantage? National Industrial Policy In Practice In the 1980s, the New Zealand government began to develop pro-trade policies in cooperation with the private sector that resulted in national advantages. The government helped systematically transform the country from an agrarian, protectionist, and regulated economy to an industrialized, globally competitive, and free-market economy. ‹#›  LO 2) How Can Nations Enhance Their Competitive Advantage? Transformation of New Zealand’s Economy Statistic New Zealand New Zealand New Zealand New Zealand in 1993 in 2003 in 2013 in 2022 GDP per capita $13,094 $21,914 $42,977 $48,800 NZX 50 stock 2,200 2,350 4,720 10,780 market index Unemployment 9.8% 5.0% 5.5% 3.5% rate National debt, % 47% 26% 44% 33% of GDP ‹#›  Theories of International Trade and Investment Theories of International Trade and Investment  LO 3) Why and How do Firms Internationalize? Why and How do Firms Internationalize? The internationalization process model describes how companies expand abroad. According to this model, internationalization takes place in incremental stages over a long period. Initially, firms begin exporting, the simplest foreign market entry strategy. Firms gradually progress to foreign direct investment (FDI), the most complex entry strategy. The progression from exporting to FDI coincides with increasing levels of both risk and control. ‹#›  LO 3) Why and How do Firms Internationalize? Recall: Foreign Direct Investment (FDI) An internationalization strategy in which the firm establishes a physical presence abroad. Acquisition of productive assets such as capital, technology, labor, land, plant, and equipment. ‹#›  LO 3) Why and How do Firms Internationalize? Stock of Inward and Outward FDI ‹#›  LO 3) Why and How do Firms Internationalize? Stages in the Internationalization Process of the Firm Domestic Focus Pre-Export Stage Experimental Involvement Active Involvement Committed Involvement ‹#›  LO 3) Why and How do Firms Internationalize? How do firms internationalize? The framework illustrated moving from left to right, has been suggested as a stage model of sequential commitment to a foreign market over time. ‹#›  LO 3) Why and How do Firms Internationalize? Born Global Firms Born global firms, internationalize their operations from their start. Can generate at least a quarter of their revenues from overseas within the first three years. Many tech companies follow the ‘‘born’’ global theory and have experienced success across the globe. Some examples of born global firms include Spotify, Uber, Airbnb, and Mojang (maker of Minecraft). ‹#›  LO 3) Why and How do Firms Internationalize? Born Global Firms Born global firms have emerged in large numbers for two main reasons: 1) Globalization has made doing international business easier than ever before. 2) Advances in communication and transportation technologies have reduced the costs. ‹#›  LO 4) How Can Internationalizing Firms Gain and Sustain Competitive Advantage? Strategies Internationalizing Firms Use to Gain and Sustain Competitive Advantage MNEs such as Nestlé, Unilever, Sony, and Coca-Cola have all expanded abroad on a massive scale. How do multinationals internationalize toward gaining and sustaining competitive advantage in global markets? Most explanations have emphasized FDI, the preferred entry strategy of MNEs. ‹#›  LO 4) How Can Internationalizing Firms Gain and Sustain Competitive Advantage? Strategies Internationalizing Firms Use to Gain and Sustain Competitive Advantage Scholars have developed theories of how firms can use FDI to gain and sustain competitive advantage. They include: Monopolistic Advantage Theory, Internalization Theory, and Dunning’s Eclectic Paradigm. Key characteristics, benefits and examples of each perspective are presented next. ‹#› Theoretical Perspectives in Why Firms Choose FDI ‹#›  LO 4) How Can Internationalizing Firms Gain and Sustain Competitive Advantage? Non-FDI-Based Explanations In the 1980s, firms began to recognize the importance of collaborative ventures and other flexible entry strategies. International collaborative ventures are a form of cooperation between two or more firms. Partners pool resources and capabilities to create synergies and share risks of joint efforts. Collaboration provides access to foreign partners know-how, capital, distribution channels, or marketing. ‹#› What have we learned? How can we use it? ‹#›  BUSMHR 2000 Intro to International Business CH 5: Theories of International Trade and Investment  BUSMHR 2000 Intro to International Business CH 6: Political and Legal Systems in National Environments Political and Legal Systems in National Environments ‹#›  Learning Objectives After completing this chapter, you should be able to: 1) Describe political and legal environments in international business. 2) Loading… Understand political systems. 3) Understand legal systems. 4) Describe the participants in political and legal systems. 5) Identify the types of country risk produced by political and legal systems. 6) Know about managing country risk. ‹#›  LO 1) Describe Political and Legal Environments in International Business What is country risk? Sometimes termed political risk, it is one of four major types of international business risks. Exposure to potential loss or adverse effects on company operations and profitability. ‹#›  LO 1) Describe Political and Legal Environments in International Business Dimensions of Country Risk Loading… ‹#›  LO 1) Describe Political and Legal Environments in International Business The PESTEL Model and Country Risk Although the immediate cause of country risk is a political or legal factor, underlying such factors may be economic, social, or technological developments. ‹#›  LO 1) Describe Political and Legal Environments in International Business The PESTEL Framework Managing Country Risk Although the immediate cause of country risk is a political or legal factor, underlying such factors may be economic, social, or technological developments. ‹#›  LO 1) Describe Political and Legal Environments in International Business Country Risk in Select Countries ‹#›  LO 1) Describe Political and Legal Environments in International Business What is a political system? In political science, a political system defines the process for making official government decisions. It is usually cultural compared to the legal system, economic system, and other social systems. ‹#›  LO 1) Describe Political and Legal Environments in International Business What is a legal system? A legal system is a system for interpreting and enforcing laws. Laws, regulations, and rules establish norms for conduct. ‹#›  LO 1) Describe Political and Legal Environments in International Business Political and Legal Systems Relate to Country Risk Adverse developments in political and legal systems give rise to country risk – relevant to managers of MNEs. Loading… ‹#›  LO 2) Understand Political Systems To understand political/country risk in greater detail, we consider three major types of political systems: 1) Authoritarianism 2) Socialism 3) Democracy These categories are not mutually exclusive. Many democracies also include some elements of socialism. ‹#›  LO 2) Understand Political Systems Relationship between political and economic systems: Authoritarianism associated with Command Economies Democracy associated with Market Economies Socialism associated with Mixed Economies ‹#›  LO 2) Understand Political Systems Authoritarianism Authoritarianism centralizes power in the government. Well-known authoritarian states from the past include the Soviet Union (1918–1991), and China (1949–1980s). The state may seek to control not only all economic and political matters but also the attitudes, values, and beliefs of the citizenry. ‹#›  LO 2) Understand Political Systems Socialism Based on a collectivist ideology. Collective welfare of people is seen to outweigh the welfare of the individual. Government controls some basic means of production, distribution, and commercial activity. ‹#›  LO 2) Understand Political Systems Social Democracy Ideology that supports economic and social interventions to promote social justice through democratic means. Found in areas of Western Europe and also countries such as Brazil and India. Social democratic governments intervene in the private sector and in business activities, as in Italy and Norway. Corporate income tax rates are often relatively high, as in France and Sweden. ‹#›  LO 2) Understand Political Systems Democracy The word democracy most often refers to a form of government in which people choose leaders by voting (government by the people). Characterized by: 1) private property rights which encourages innovation, and 2) limited government, which allows for more open markets. Virtually all democracies include elements of socialism, such as government intervention in the affairs of individuals and firms. ‹#›  LO 2) Understand Political Systems Democracy and Openness Openness includes lack of regulation, and low barriers to the entry of firms in foreign markets. Openness is associated with MNE management considerations such as: – Successful market entry. – Increased market demand. – Greater levels of competition. ‹#›  LO 2) Understand Political Systems Examples of Countries Under Various Political Systems  LO 2) Understand Political Systems Mixed Political System Many countries, including Australia, Canada, the United States, and those in Europe, are best described as having a mixed political system. They are characterized by a strong private sector (e.g., markets) and a strong public sector, with considerable government regulation and control. ‹#›  LO 2) Understand Political Systems National Governance System of policies and processes by which nations are governed. How public institutions develop laws and regulations, conduct public affairs, and manage resources. Is closely related to political freedom and economic freedom. ‹#›  LO 2) Understand Political Systems Political freedom is characterized by: Free and fair elections. Right to form political parties. Existence of a legislative body. Self-determination. ‹#›  LO 2) Understand Political Systems Economic Freedom Extent of government interference in business, and strictness of the regulatory environment. Ease with which commercial activity is carried out according to market forces. Flourishes when governments support freely operating markets and the rule of law. ‹#›  Relationship Between Quality of National Governance and GDP Relationship Between Quality of National Governance and Per-Capita GDP (in US$) Note: On the horizontal access, a high score indicates better quality national governance. ‹#›  LO 3) Understand Legal Systems Legal Systems Provide a framework of rules and norms of conduct that mandate, limit, or permit specified relationships among people and organizations and provide punishments for those who violate them. Legal systems are dynamic—they evolve over time to represent each nation’s changing social values and the evolution of their social, political, economic, and technological environments. ‹#›  LO 3) Understand Legal Systems Rule of Law Legal system in which rules are clear, publicly disclosed, fairly enforced, and widely respected by individuals, organizations, and the government. When the legal system is applied to all citizens equally, and issued by recognized government authorities. Enforced fairly and systematically by police forces and formally organized judicial bodies. Common in advanced economies. Economic activity suffers and uncertainty increases when the rule of law is weak. ‹#›  LO 3) Understand Legal Systems Legal Systems Nations are primarily governed by one of four basic legal systems: common law, civil law, religious law, or mixed. These legal systems are the foundation for laws and regulations. ‹#›  LO 3) Understand Legal Systems Dominant Legal Systems in Select Countries ‹#›  LO 3) Understand Legal Systems Common Law Originated in England and spread to Australia, Canada, U.S., (also known as case law). Loading… The basis of law is tradition, past practices, and legal precedents set by courts via interpretation of statutes, legislation, and past rulings. Judges have significant power to interpret laws based on the circumstances of individual cases. Thus, common law is relatively flexible. ‹#›  LO 3) Understand Legal Systems Civil Law A legal system originating in mainland Europe and adopted in much of the world. Origins go back to the framework of Roman law, and the Napoleonic Code. Core principles codified into a referable system, which serves as the primary source of law. ‹#›  LO 3) Understand Legal Systems Dominant Legal Systems and Management Implications ‹#›  LO 3) Understand Legal Systems Religious Law Influenced by religious beliefs, ethical codes, and moral values viewed as mandated by a supreme being. The most important religious legal systems are based on Hindu, Jewish, and Islamic law. Islamic law, known as the shariah, is based on the Qur’an, the holy book of Muslims. ‹#›  LO 4) Describe Participants in Political and Legal Systems Participants in Political and Legal Systems Governments International Organizations Regional Trade Organizations Special Interest Groups Competing Firms ‹#›  LO 4) Describe Participants in Political and Legal Systems Issues of Concern to Special Interest Groups ‹#›  LO 4) Describe Participants in Political and Legal Systems Country Risk From Political Systems How do political systems create challenges for firms in international business (i.e., increase country risk)? Government Seizure Embargoes and Sanctions Boycotts Against Firms or Nations ‹#›  LO 4) Describe Participants in Political and Legal Systems Government Seizure Confiscation is seizure of corporate assets without compensation (e.g., farms in Zimbabwe). Expropriation is seizure with compensation (e.g., of ExxonMobil in Venezuela). Nationalization is seizure of an entire industry with or without compensation (e.g., oil and gas in Bolivia). ‹#›  LO 4) Describe Participants in Political and Legal Systems Embargoes and Sanctions An embargo is an official ban on exports to, or imports from a particular country to isolate it and punish its government. A sanction is a type of trade penalty imposed on one or more countries by one or more other countries. Sanctions typically take the form of tariffs, trade barriers, import duties, and import or export quotas. ‹#›  LO 4) Describe Participants in Political and Legal Systems Boycotts Against Firms or Nations A boycott is a voluntary refusal to engage in commercial dealings with a nation or a company. Result in lost sales and increased costs (for public relations activities needed to restore the firm’s image). Disneyland Paris and McDonald’s have been the targets of boycotts by French farmers, for example. ‹#›  LO 4) Describe Participants in Political and Legal Systems Country Risk From Legal Systems Country Risk Arising from the Host-Country Legal Environment Antitrust Laws Foreign Direct Investment Laws Marketing Laws Environmental Laws Internet and E-Commerce Regulation ‹#›  LO 4) Describe Participants in Political and Legal Systems Country Risk From Legal Systems Country Risk Arising from the Home-Country Legal Environment Foreign Corrupt Practices Act (FCPA) Accounting and Reporting Laws Transparency and Financial Reporting ‹#›  LO 4) Describe Participants in Political and Legal Systems Extraterritoriality Application of home-country laws to persons or conduct outside national borders. Transparency Companies regularly reveal substantial information about their financial condition and accounting practices. ‹#›  LO 4) Describe Participants in Political and Legal Systems Managing Country Risk Q: How should managers respond to country risk? A: There are specific strategies managers can use. ‹#›  LO 4) Describe Participants in Political and Legal Systems The PESTEL Framework Managing Country Risk Although the immediate cause of country risk is a political or legal factor, underlying such factors may be economic, social, or technological developments.  LO 4) Describe Participants in Political and Legal Systems Specific Strategies: Managing Country Risk Proactive Environmental Scanning (e.g., PESTEL) Alliances with Qualified Local Partners Establish Protection through Legal Contracts Strict Adherence to Ethical Standards ‹#› What have we learned? How can we use it? ‹#›  BUSMHR 2000 Intro to International Business CH 6: Political and Legal Systems in National Environments  BUSMHR 2000 Intro to International Business CH 9: International Monetary and Financial Environment International Monetary and Financial Environment ‹#›  Learning Objectives After completing this chapter, you should be able to: 1) Learn about exchange rates and currencies in international business. 2) Loading… Explain how exchange rates are determined. 3) Understand the emergence of the modern exchange rate system. 4) Examine the implications of the current global debt crisis. 5) Identify the key participants in the monetary and financial systems. ‹#›  LO 1) Exchange rates and currencies in international business. The Four Risks in International Business  LO 1) Exchange rates and currencies in international business. Currency A currency is a form of money and unit of exchange for Loading… goods and services. Currencies are always trades in pairs so the “value” of one of the currencies in the pair is relative to the other. ‹#›  LO 1) Exchange rates and currencies in international business. What’s the Difference: Money vs. Currency? Currency refers to the specific form of money that’s in circulation, such as coins and banknotes. Money can include things other than coins and banknotes, for example M1 includes checkable (demand) deposits. Money serves as a store of value, a unit of account, and a medium of exchange. ‹#›  LO 1) Exchange rates and currencies in international business. Cryptocurrencies? Cryptocurrencies are not issued by governments or other central authorities (and are banned in some countries). They do not exist in physical form (like paper money), or have intrinsic value like money. They are used very little in international trade. This arises because cryptocurrencies are subject to considerable price volatility and many firms view cryptocurrencies as less trustworthy. ‹#›  LO 1) Exchange rates and currencies in international business. Exchange Rate The price of one currency expressed in terms of another. The most common include EUR € /USD$, USD$/JPY¥ and GBP£/USD$. The forex market is the over-the-counter (OTC) global marketplace that determines the exchange rate of currencies around the world. ‹#›  LO 1) Exchange rates and currencies in international business. Convertible and Nonconvertible Currencies A convertible currency can be easily exchanged for other currencies. Hard currencies include the British pound £, European euro €, Japanese yen ¥, and the U.S. dollar $. ‹#›  LO 1) Exchange rates and currencies in international business. Exchange Rates Selected Currencies How do we determine The key is to know an exchange rate? which currency is The formula is simple: considered the e = P*/P domestic currency and where e is the then set it as the exchange rate, P* denominator of the represents the price of equation. the foreign currency, and P is the price of For the purposes of the domestic currency. the exchange rate formula, the currency you are holding and want to trade is the domestic currency.  LO 1) Exchange rates and currencies in international business. Foreign Exchange Refers to all forms of money that are traded internationally, including foreign currencies, bank deposits, checks, and Loading… electronic transfers. The foreign exchange (forex, FX, or currencies) market is the largest financial market in the world – larger even than the stock market! ‹#›  LO 1) Exchange rates and currencies in international business. Currency Risk Arises from changes in exchange rates and affects firms’ international business. Fluctuations in the exchange rate between order and delivery time can cost (or earn) the firm money. Exchange rates can affect the firm in various other ways, too (e.g., costs of inputs, sales, market entry strategies). ‹#›  LO 1) Exchange rates and currencies in international business. Insuring Against Foreign Exchange Risk When a firm protects itself against this type of risk in the foreign exchange market, it is called hedging. The spot exchange rate is considered, as is use of currency swaps, options, and forward contracts. ‹#›  LO 1) Exchange rates and currencies in international business. Case Study: GBP and USD Imagine the spot exchange rate is £1 = $1.26 when the market opens. As the day progresses, dealers may demand more USD and fewer GBP. At end of day, the spot rate is £1 = $1.18. What happened? Each pound now buys fewer dollars. The dollar has therefore appreciated in value vis-à-vis the pound. The pound has depreciated vis-à-vis the dollar. ‹#›  LO 1) Exchange rates and currencies in international business. Selected Exchange Rates Against the U.S. Dollar over Time Note: Right-hand The euro became scale is for the common Japanese yen; left- currency of various hand scale is for European Union all other countries in 1999, currencies. replacing most European For example, in currencies. 2020, the Mexican peso was trading at 22 pesos per one U.S. dollar. ‹#›  LO 1) Exchange rates and currencies in international business. Case Study: EU and USD Suppose, the exchange rate was previously at €1 = $1. Now, the rate has gone to €1.50 = $1. Effect on European exports to the U.S.? The euro depreciated vis-à-vis the dollar. Demand for European exports to the U.S. would increase. Firms may be able to raise prices and generate greater total revenues depending on the extent to which input costs increase. Effect on European consumers of U.S. imports? Because U.S. goods and services now cost more, consumers in the Eurozone demand fewer of them. ‹#›  LO 2) How exchange rates are determined. How Are Exchange Rates are Determined? Currency values and their exchange rates are determined by various factors, including: Economic Growth Inflation Market Psychology Government Intervention ‹#›  LO 2) How exchange rates are determined. Economic Growth Increase in value of goods and services the economy produces (i.e., GDP = C + Ig + G + Xn). To accommodate economic growth, a nation’s central bank may increase the money supply. This increases the supply and demand of the nation’s money supply, and, by extension, nation’s currency. ‹#›  LO 2) How exchange rates are determined. Inflation Inflation is an increase in the price of goods and services, and is measured in different ways. When inflation occurs, money buys less than in preceding years, and real purchasing power is diminished. There is a measurable link between inflation, interest rates, and currency values. ‹#›  LO 2) How exchange rates are determined. Inflation in Select Countries Note: Chart shows annual percentage rate of inflation. Left-hand scale is for Turkey, Mexico, and the United States; right-hand scale is for Argentina, Brazil, and Russia.  LO 2) How exchange rates are determined. Market Psychology Exchange rates are often affected by market psychology, the unpredictable behavior of investors. Herding is the tendency of investors to mimic others’ actions. Momentum trading occurs when investors buy stocks whose prices have been rising and vice-versa. ‹#›  LO 2) How exchange rates are determined. Government Intervention Governments often act to influence their currencies (or have policies that may affect them indirectly). A devaluation reduces the official value of a currency relative to other currencies, for example. An undervalued currency can result in a trade surplus (when a nation’s exports exceed imports). ‹#› LO 2) How exchange rates are determined.  LO 2) How exchange rates are determined. Supply and Demand In a free market, the levels of supply and demand for a currency affect its price. Ceteris paribus (all else equal): An increase in supply of a currency, decreases its price and vice-versa. An increase in demand for a currency, increases it’s price and vice versa. ‹#›  LO 2) How exchange rates are determined. Supply and Demand of Bahraini Dinars An increase in supply of a currency, decreases its price and vice-versa. An increase in demand for a currency, increases it’s price and vice versa.  LO 3) Emergence of the modern exchange rate system. Monetary and Financial Systems The international monetary system is the institutional framework, rules, and procedures by which national currencies are exchanged for each other. ‹#›  LO 3) Emergence of the modern exchange rate system. Emergence of the Modern Exchange Rate System During much of the period from the late 1800s through the 1920s, global trade grew significantly. The Great Depression (1929–1939) and World War II (1939–1945) coincided with a collapse of the international trading system and relationships among nations. Several countries then came together to energize international commerce and devise a framework for stability in the international monetary and financial systems. ‹#›  LO 3) Emergence of the modern exchange rate system. Emergence of the Modern Exchange Rate System The Bretton Woods Agreement of 1944 aimed to stabilize exchange rates worldwide. The U.S. dollar was pegged to gold and other currencies to the dollar. But the system collapsed in 1971 as currency values began floating according to market forces. Although the agreement manifests itself in the modern monetary and financial systems globally still today. ‹#›  LO 3) Emergence of the modern exchange rate system. Tariff Rates in the United States Loading… ‹#›  LO 3) Emergence of the modern exchange rate system. Emergence of the Modern Exchange Rate System Today, currency values are determined in some countries by a floating exchange rate system, according to market forces, and in developing economies by a fixed exchange rate system, controlled by government intervention. ‹#›  LO 3) Emergence of the modern exchange rate system. Current Foreign Exchange Rate Arrangements ‹#›  LO 4) The Global Debt Crisis The Global Debt Crisis Growing imbalances in the finances of numerous national governments is an emergent crisis in the international monetary and financial environment. Studies show that national debt that exceeds 90 percent of a nation’s GDP diminishes GDP growth; and numerous countries have surpassed this threshold! ‹#›  LO 4) The Global Debt Crisis Gross Government Debt as Percent of GDP Fiscal imbalances are an important source of risk and uncertainty in the global business environment.  LO 4) The Global Debt Crisis The Global Debt Crisis Continuing growing imbalances in the finances of numerous national governments is an important emergent global risk. Firms must proceed with caution because massive government debt can indicate economic instability, reduced buyer purchasing power, and other challenges. ‹#›  LO 4) The Global Debt Crisis Crowding-Out Effect Government borrowing competes with the private sector. May result in lower business investment. This can lead to lower future growth. ‹#›  LO 4) The Global Debt Crisis Crowding-Out Effect  LO 5) Key participants in the monetary and financial systems. Global Financial System The collective of financial institutions that facilitate and regulate investment and capital flows worldwide. ‹#›  LO 5) Key participants in the monetary and financial systems. Global Financial System The growing integration of financial and monetary activity worldwide has several drivers and outcomes. Increased global and regional interdependence of financial markets. The development of new technologies and payment systems and the use of the internet in global financial activities. The ongoing evolution of monetary and financial regulations worldwide. The growing role of single-currency systems, such as the euro in twenty EU countries. ‹#›  LO 5) Key participants in the monetary and financial systems. Key Participants and Relationships in the Global Monetary and Financial Systems  LO 5) Key participants in the monetary and financial systems. International Monetary Fund (IMF) Aims to stabilize currencies by monitoring the foreign exchange systems of member countries and lending money to developing economies. Addresses currency, banking and foreign debt crises. Bank for International Settlements (BIS) Institution offering banking services for national central banks and a forum for discussing monetary and regulatory policies. World Bank Originally known as the International Bank for Reconstruction and Development, it provides loans and technical assistance to low- and middle-income countries with the goal of reducing poverty. ‹#›  LO 5) Key participants in the monetary and financial systems. Central Banks As the official national bank of each country, the central bank regulates the money supply and credit by doing the following: Buying and selling currencies to maintain the exchange rate at an acceptable level (e.g., monetary intervention). Increasing or decreasing interest rates on funds loaned to commercial banks. Buying and selling government securities, such as treasury bills and bonds. ‹#›  LO 5) Key participants in the monetary and financial systems. National Stock Exchanges and Bond Markets Facilities for trading securities (stocks) and debt (as in bonds). For example, the New York Stock Exchange (NYSE), and the London Stock Exchange (LSE). Commercial Banks Finance business activity, play a key role in nations’ money supplies, and exchange foreign currencies. For example, J.P. Morgan Chase, Bank of America (BOA), and the Industrial and Commercial Bank of China (ICBC). ‹#›  LO 5) Key participants in the monetary and financial systems. The Firm Firms go abroad to seek competitive advantage, and in so doing typically acquire large quantities of foreign exchange and must convert it to the currency of the home country. Firms engage in importing and exporting, joint ventures (including licensing and franchising), and in foreign direct investment activities that involve foreign exchange. ‹#› What have we learned? How can we use it? ‹#›  BUSMHR 2000 Intro to International Business CH 9: International Monetary and Financial Environment  BUSMHR 2000 Intro to International Business CH 11: Strategy in International Business Strategy in International Business ‹#›  Learning Objectives After completing this chapter, you should be able to: 1) Describe strategy in international business. Loading… 2) Understand what is meant by building the global firm using five key dimensions of successful international firms. 3) Describe the integration responsiveness-framework. 4) Learn to identify strategies based on the integration- responsiveness framework. 5) Understand what meant by organizational structure in international business. 6) Recognize foreign market entry strategies. ‹#›  Five Key Dimensions of Successful International Firms Five Key Dimensions of Successful International Firms  LO 1) Strategy in international business. Strategy A planned set of actions that managers employ to make best Loading… use of the firm’s resources and core competencies to gain a competitive advantage. Managers start by examining the firm’s specific strengths and weaknesses. They then analyze particular opportunities and threats that confront the firm. ‹#›  LO 1) Strategy in international business. The firm that aspires to become globally competitive must simultaneously seek three key strategic objectives: 1) Efficiency—the firm must build efficient international value-chains. 2) Flexibility —to accommodate diverse country-specific risks and opportunities. 3) Learning—balancing exploration (new knowledge) and exploitation (existing knowledge). ‹#›  LO 1) Strategy in international business. Strategy and Megatrends Megatrends can present opportunities and threats. Shifting demographics and international migration. Transformation of the global economic environment. Revolutionary technological advances. The natural environment and sustainability issues. ‹#›  Five Key Dimensions of Successful International Firms Five Key Dimensions of Successful International Firms  LO 2) Building the global firm. Visionary Leadership A quality of senior management that provides inspirational guidance and motivation to personnel, leading the firm to a better future. ‹#›  LO 2) Building the global firm. Four Major Traits of Visionary Leaders 1) International mind-set and cosmopolitan values. 2) Willingness to commit resources. 3) Strategic vision. 4) Willingness to invest in human assets. ‹#›  LO 2) Building the global firm. Visionary Leaders A global mindset is found in a leader who recognizes “the Loading… need for global integration and local responsiveness and works to optimize this duality. The global mindset includes an appreciation for diversity as well as homogeneity and openness to learning from everywhere.” ‹#›  Five Key Dimensions of Successful International Firms Five Key Dimensions of Successful International Firms  LO 2) Building the global firm. Organizational Culture The pattern of shared values, behavioral norms, systems, policies, and procedures that employees learn and adopt. It spells out the correct way for employees to perceive, think, and behave in relation to new opportunities and threats. Organizational culture is sometimes referred to as ‘corporate culture.’ It’s been said that ‘culture eats strategy for lunch’ and so all the more important to get the corporate culture right! ‹#›  LO 2) Building the global firm. Organizational Culture Organizational culture usually derives from the influence of founders and visionary leaders or some unique history of the firm. Firms seek to build a global organizational culture, an organizational environment that plays a key role in the development and execution of corporate global strategy. ‹#›  Five Key Dimensions of Successful International Firms Five Key Dimensions of Successful International Firms  LO 2) Building the global firm. Organizational Processes A series of actions or steps that are taken to achieve a particular objective. Management of processes to increase sales, enhance learning and other resources, and reduce risk. Leading global teams (e.g., strategic, operational) to accomplish objectives. ‹#›  LO 2) Building the global firm. Global Team Global teams (GTs), are defined as a specific type of work team in which members come from two or more national or cultural backgrounds. Project planning, technical project management, team effectiveness, cross-cultural proficiency, and stakeholder communication are essential competencies. ‹#›  LO 3) The integration-responsiveness framework. The Integration Responsiveness (IR) Framework The integration-responsiveness (IR) framework describes how internationalizing firms simultaneously seek global integration and local responsiveness. ‹#›  LO 3) The integration-responsiveness framework. Global Integration Coordination of the firm’s value-chain activities to achieve worldwide efficiency, synergy, and cross-fertilization in order to take maximum advantage of similarities between countries (e.g., in a global industry). ‹#›  LO 3) The integration-responsiveness framework. Global Industry An industry in which competition is on a regional or worldwide scale. Examples are such industries as aerospace, autos, computers, chemicals, and industrial equipment. Customer needs vary little from country to country. Firms sell relatively standardized offerings. The industry usually has only a handful of the same competitors that compete regionally or worldwide. ‹#›  LO 3) The integration-responsiveness framework. Firms that emphasize global integration: Make and sell standardized (uniform with minimal adaptation) products and services to capitalize on converging tastes and preferences. Compete on a regional or on a worldwide basis and seek to minimize operating costs by centralizing value-chain activities and emphasizing scale economies. ‹#›  LO 3) The integration-responsiveness framework. Local Responsiveness In contrast to global integration, many companies seek to respond to conditions in individual countries. They are typically found in multidomestic industries. Managing the firm’s value-chain activities, and addressing diverse opportunities and risks, on a country-by-country basis. ‹#›  LO 3) The integration-responsiveness framework. Multidomestic Industry An industry in which competition takes place on a country- by-country basis. Beverage companies produce various brands and flavors in markets worldwide. Coca-Cola offers “Georgia Coffee” in Japan, “Café Zu” in Thailand, “Inca Cola” in Peru, and “Burn” in France. ‹#›  LO 3) The integration-responsiveness framework. Firms that emphasize local responsiveness: Are meeting the specific needs of buyers in individual countries. Allowed to adapt to customer needs locally due to the competitive environment. Free local managers to adjust offerings, marketing, and practices to suit individual market conditions. ‹#›  LO 3) The integration-responsiveness framework. The Global Integration, Local Responsiveness Framework ‹#›  LO 4) Strategies based on the integration- responsiveness framework. Strategies Based on the IR Framework The IR framework presents four alternative strategies: 1) Home Replication Strategy 2) Multidomestic Strategy 3) Global Strategy 4) Transnational Strategy ‹#›  LO 4) Strategies based on the integration- responsiveness framework. Home Replication Strategy The firm basically replicates (i.e., copies) what it does in the home-country. Firm distributes products through an intermediary (imports) and doesn’t adapt them to local customers. Management holds little interest in foreign markets and expects little knowledge gained from foreign operations. ‹#›  LO 4) Strategies based on the integration- responsiveness framework. Multidomestic Strategy Managers recognize and emphasize differences among national markets. Headquarters delegate considerable autonomy to each country manager. Managers can operate independently and pursue local responsiveness. Products and services are adapted to suit the needs and wants of buyers in each country. ‹#›  LO 4) Strategies based on the integration- responsiveness framework. Global Strategy In the extreme, the global strategy asks, “Why not make the Loading… same thing, the same way, everywhere?” Thus, the true global strategy emphasizes central coordination. Activities such as R&D and manufacturing are centralized at headquarters, and management tends to view the world as one large marketplace. ‹#›  LO 4) Strategies based on the integration- responsiveness framework. Transnational Strategy Combines advantages of multidomestic and global strategies. Can be summarized as “standardize where feasible; adapt where appropriate.” The strategy accommodates pressures for both local responsiveness and global integration. Organizes production, marketing, and other value-chain activities on a global scale. ‹#›  LO 4) Strategies based on the integration- responsiveness framework. Strategies in the IR Framework ‹#›  LO 4) Strategies based on the integration- responsiveness framework. Case Study: IKEA Some 90% of the product line is identical across more than two dozen countries. IKEA modifies some furniture offerings to suit tastes in individual countries, however. An overall, standardized marketing plan is centrally developed at the firm’s headquarters in Sweden, but local adjustments made. Management decentralizes some decision-making to local stores too, such as product displays. ‹#›  Five Key Dimensions of Successful International Firms Five Key Dimensions of Successful International Firms  LO 5) Organizational structure in international business. Organizational Structure Firms develop organizational structures to manage international operations. Reporting relationships inside the firm that specify the links between people, functions, and processes. Management strategy to devise a structure consistent with a firm’s vision. ‹#›  LO 5) Organizational structure in international business. Centralized or Decentralized Structure? Structures can be more centralized (e.g., global integration) or decentralized (e.g., local responsiveness). Centralized (can be more hierarchical, top-down decision- making). Decentralized can facilitate more bottom-up decision-making in a “flatter” organizational structure. “Think globally and locally and act appropriately,” describes the reality MNEs face. ‹#›  LO 5) Organizational structure in international business. How Value Chain Activities Are Shared in the Typical, Global MNE  LO 5) Organizational structure in international business. Different Organizational Structures Export Department International Division Geographic Area Structure Product Structure Functional Structure Global Matrix Structure ‹#›  LO 5) Organizational structure in international business. Export Department Associated with home replication strategy. The export department is the simplest organizational structure, in which a unit within the firm manages all export operations. ‹#›  LO 5) Organizational structure in international business. International Division Structure Slightly more advanced is the international division structure, in which all international activities are centralized within one organizational unit, separate from the firm’s domestic units. ‹#›  LO 5) Organizational structure in international business. Geographic Area Structure Providing a good balance between global integration and local adaptation. The geographic area structure features control and decision-making that are decentralized to the level of individual geographic regions. ‹#›  LO 5) Organizational structure in international business. Product Structure Highly centralized and associated with global strategy. Using the product structure, decision-making and management of international operations are centralized and organized by major product line. ‹#›  LO 5) Organizational structure in international business. Functional Structure The functional structure organizes decision making by functional activity, such as production and marketing. ‹#›  LO 5) Organizational structure in international business. Global Matrix Structure Closely associated with a The global matrix structure transnational strategy blends the geographic area, (leverages benefits of global product, and functional strategy and structures in an attempt to responsiveness to local leverage the benefits. needs). ‹#›  LO 6) Foreign market entry strategies. Foreign Market Entry Strategies Market entry strategy is a planned distribution and delivery method of goods or services to a new target market. ‹#›  LO 6) Foreign market entry strategies. Foreign Market Entry Strategies To select a strategy, managers must consider the firm’s resources and capabilities, conditions in the target country, risks inherent in each venture, competition from existing and potential rivals, and the characteristics of the product or service to be offered in the market. ‹#›  LO 6) Foreign market entry strategies. Classifying Foreign Market Entry Strategies  LO 6) Foreign market entry strategies. Case Study: Samsung In the 1970s, Samsung began exporting televisions and other products to Europe and North America. In the 1990s, it entered joint ventures with various partners abroad to manufacture televisions, refrigerators, and video equipment. Around the same time, Samsung used FDI to establish regional headquarters in China, Europe, Singapore, and the United States. In the 1990s, the firm set up factories in China and other countries to manufacture consumer electronics and appliances. By 2005, Samsung had established 64 manufacturing and sales subsidiaries and 13 R&D centers around the world. ‹#›  LO 6) Foreign market entry strategies. Typical Stages in Firm Internationalization ‹#›  LO 6) Foreign market entry strategies. Foreign Market Entry Strategies An important exception to the stages approach to internationalization are born global firms. The rise of these companies has coincided with globalization and diffusion of technologies. Born globals internationalize much earlier and faster than firms did in the past. Many reach advanced stages of internationalization within the first few years of their founding. ‹#› What have we learned? How can we use it? ‹#›  BUSMHR 2000 Intro to International Business CH 11: Strategy in International Business