Global Business Environment Ebook PDF

**Course Name: Global business Environment** **Module 1: Introduction** **[Meaning, Nature and Scope of International Business]** International Business is the process of focusing on the resources of the globe and objectives of the organizations on global business opportunities and threats. International business defined as global trade of goods/services or investment. More comprehensive view does not focus on the "firm" but on the exchange process.\ Free Trade occurs when a government does not attempt to influence, through quotas or duties, what its citizens can buy from another country or what they can produce and sell to another country. The benefits of trade allow a country to specialize in the manufacture and export of products that can be produced most efficiently in that country. The pattern of International Trade displays patterns that are easy to understand (Saudi Arabia/oil or Mexico/labor intensive goods). Others are not so easy to understand (Japan and cars). **Nature of International Business** 1\. Accurate Information\ 2. Information not only accurate but should be timely\ 3. The size of the international business should be large\ 4. Market segmentation based on geographic segmentation\ 5. International markets have more potential than domestic markets **Scope of International Business** The significance of international business is better than ever as companies around the world become connected. It has always played a major role in a country's growth and economy. International business is very important for the sustenance of a country as the gross domestic product or the GDP is reliant on foreign business. It is a very broad term because it holds various types of rules and regulations. It refers to business activities that take place transversely through national frontiers. International business is much broader than international trade. It includes not only international trade (i.e., export and import of goods and services) but also a wide variety of other ways in which the firms operate internationally. International Management professionals are familiar with the language, culture, economic and political environment, and business practices of countries in which multinational firms actively trade and invest. Major forms of business operations that constitute international business are as follows: - Merchandise means goods that are tangible, i.e., those that can be seen and touched. When viewed from this perceptive, it is clear that while merchandise exports mean sending tangible goods abroad, merchandise imports means bringing tangible goods from a foreign country to one's own country. - Service exports and imports involve trade in intangibles. It is because of the intangible aspect of services that trade in services is also known as invisible trade. - Permitting another party in a foreign country to produce and sell goods under your trademarks, patents or copyrights in lieu of some fee is another way of entering into international business. It is under the licensing system that Pepsi and CocaCola are produced and sold all over the world by local bottlers in foreign countries. - Foreign investment is another important form of international business. Foreign investment involves investments of funds abroad in exchange for financial return. Foreign investment can be of two types: direct and portfolio investments. - It might arrive from patent rights, technological advantages, product segregation etc. Another reason for internationalization is limited market information. - Those who add an international business to their assortment may also advantage from currency fluctuations. For example, when the U.S. dollar is down, you might be able to export more as foreign customers benefit from the favorable currency exchange rate. - Some demographic trends such as a contraction in birth rate decline in domestic demand, fully tapped market potential have adverse effects on some businesses. When the domestic market is small, international business is the option for growth. Depression in the home market drives companies to explore foreign markets. - One of the top advantages of international business is that you may be capable to enlarge your number of probable clients. Each country you add to your list can open up a new path to business growth and increased revenues. - Foreign markets both developed country and developing country provide considerable expansion opportunities for the firms from a developing country. MNCs are interested in number of developing countries due to initially increasing in their income and population of the predictable 1 billion increases in world population during 2000 to 2015; only about 3% will be in the high-income countries, foreign markets, both developed and developing countries after ample opportunities for developing country firms also. - International business can enlarge and expand its activities. This is because it earns very high profits. It also gets financial help from the government. - International markets can open up avenues for a new line of service or products. It can also give you an opportunity to specialize in a different area to serve that market. **What is the need for International Business?** **The following are the reasons for international business:** 1\. To achieve higher rate of profits\ 2. Expanding the production capacity beyond the demand of the domestic country\ 3. Severe competition in the home country\ 4. Limited home market\ 5. Political conditions\ 6. Availability of technology and managerial competence\ 7. Cost of manpower, transportation\ 8. Proximity to the availability of raw material\ 9. Liberalization, Privatization and Globalization (LPG)\ 10. To increase the market share\ 11. Increase in cross border business is due to falling trade barriers (WTO), decreasing costs in telecommunications and transportation; and freer capital markets **Importance of International Business** The factors or reasons which provoke or motivate firms for international business may be broadly divided into two categories viz. the pull factors and push factors. The pull factors are proactive reasons and those forces of attractor which pull the business to the foreign markets with a view to achieve relative profitability and growth. The push factors pertain to the compulsions of the domestic market prospects like saturation of the market which drive firms towards internationalization. Most of the push factors are reactive reasons. The following are the reasons for going international business: **1) A Profit advantage:** When intro-national business is less profitable than domestic, there is an increase in total prom. There are many firms which make major share of their profits from the foreign markets for instance, certain MNCS which earn percent profits from foreign markets. In certain cases when exporting even on no-loss-no-profit basis is available due to optimum utilization of the capacity, the profitability of domestic business is increased. While in some cases, the whole manufacturing of a product or only certain stages of it are done abroad to reduce the cost of production. **2) Growth opportunities:** Foreign markets in both developed country & developing country provide substantial growth opportunities for the firms. MNCS are interested in number of developing countries due to steadily rising income and population of estimated 1 billion increase in world population during 1999 to 2014; only about 3% will be in the high income countries. **3) Limitations of Domestic Market:** Some demographic trends such as contraction in birth rate decline in domestic demand, fully tapped market potential have adverse effects on some businesses. When domestic market is small, international business is the alternative for growth. Recession in the home market drives companies to explore foreign markets. **4) Competition:** A protected market does not lead company to seek business outside the home market. The economic liberalization since 1991 invited competition from foreign firms as well as from domestic ones. **5) Government Policies:** Many governments provide incentives to domestic companies to export and invest in foreign countries while some countries give no importance. Domestic foreign companies are permitted to enter certain industries subject to certain conditions for export. In many cases, government gives permission to companies to earn foreign exchange for their imports and make payments for royalty, dividends etc. as per foreign exchange requirements. **6) Monopoly Power:** It may arrive from patent rights, technological advantages, product differentiation etc. Another reason for internationalization is exclusive market information (pertaining to knowledge about foreign customers, market places and situations not widely shared). **7) Spin off benefits** is a means of gaining better market share domestically as it improves the image of the company when domestic customers know that the company is an export making company. They will be more tempted to buy from such a company. Moreover, it would be benefited by eco incentives from the government. **8) Strategic Management:** There are many global corporations which plan for manufacturing facilities, logistical systems, finance flows and marketing policies considering the entire world as a single market. **Reasons for Recent International Business Growth** 1\. Expansion of technology\ 3. Transportation is quicker\ 4. Communications enable control from afar\ 5. Transportation and communications costs are more conducive for international operations\ 6. Liberalization of cross-border movements.\ 7. Lower Governmental barriers to the movement of goods, services, and resources enable companies to take better advantage of international opportunities. **[Driving and Restraining Forces of International Business]** **\ **The restraining forces slowing down the progress of companies that take up international business are: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Driving factors The process of globalization is characterized by the interplay of dynamic forces that act as movers and restraining factors, which offers significant challenges to traditionally established ways of doing businesses. Since the driving forces of globalization are considerably stronger than the restraining factors, globalization of business assumes much higher significance. **Movers of Globalization** - **Economic liberalization:** Economic liberalization, both in terms of regulations and tariff structure, has greatly contributed to the globalization of trade and investment. The emergence of the multilateral trade regime under the WTO has facilitated the reduction of tariffs and non-tariff trade barriers. In the coming years, the tariffs are expected to decline considerably further. - **Technological Breakthrough:** The breakthroughs in science and technology have transformed the world virtually into a global village, especially manufacturing, transportation, and information and communication technologies, as discussed here. - **Manufacturing technology:** Technological advancements transformed manufacturing processes and made mass production possible, which led to the industrial revolution. The production efficiency resulted in cost-effective production of uniform goods on a large scale. In order to achieve the scale economies to sustain large-scale production, markets beyond national boundaries need to be explored. - **Transportation technology:** The advents in all means of transports by roads, railways, air, and sea have considerably increased the speed and brought down the costs incurred. Air travel has become not only speedier but cheaper. This has boosted the movement of people and goods across countries. - **Information and communication technology:** The advent of information and communication technology and the fast developments in the means of transport have considerably undermined the significance of distance in country selection for expanding business. There has been a considerable reduction in international telecommunication costs due to improved technology and increased competition. This has given rise to new business models, such as the off-shore delivery of services to global locations and electronic business transactions. - **Multilateral Institutions:** A number of multilateral institutions under the UN framework, set up during the post-World War II era, have facilitated exchanges among countries and became prominent forces in present-day globalization. Multilateral organizations such as the GATT and WTO contributed to the process of globalization and the opening up of markets by consistently reducing tariffs and increasing market access through various rounds of multilateral trade negotiations. The evolving multilateral framework under the WTO regime, such as Trade-Related Investment Measures (TRIMS), Trade-Related Aspects of Intellectual Property Rights (TRIPS), General Agreement on Trade in Services (GATS), dispute settlement mechanism, anti-dumping measures, etc., has facilitated international trade and investment. Besides, the International Monetary Fund has contributed to ensuring the smooth functioning of the international monetary system. - **International Economic Integrations:** Consequent to World War II, a number of countries across the world collaborated to form economic groups so as to promote trade and investment among the members. The Treaty of Rome in 1957 led to the creation of the European Economic Community (EEC) that graduated to the European Union (EU) so as to form a stronger Economic Union. The US, Canada, and Mexico collaborated to form the North American Free Trade Agreement (NAFTA) in 1994. The reduction of trade barriers among the member countries under the various economic integrations around the world has not only contributed to the accelerated growth in trade and investment but also affected the international trade patterns considerably. - **Move towards free marketing system:** The demise of centrally planned economies in Eastern Europe, the former USSR, and China has also contributed to the process of globalization as these countries gradually integrated themselves with the world economy. The Commonwealth of Independent States (CIS) countries---all former Soviet Republics---and China have opened up and are moving towards market-driven economic systems at a fast pace. However, the exceptions to free market systems are the autocratic countries, such as North Korea and Cuba. - **Rising research and development Costs:** The rapid growth in market competition and the ever-increasing insatiable consumer demand for newer and increasingly sophisticated goods and services compel businesses to invest huge amounts on research and development (R&D). In order to recover the costs of massive investments in R&D and achieve economic viability, it becomes necessary to globalize the business operations. For instance, software companies such as Microsoft, Novel, and Oracle, commercial aircraft manufacturers like Boeing and Airbus, pharmaceutical giants such as Pfizer, Glaxo SmithKline, Johnson & Johnson, Merck, and Novartis, etc., can hardly be commercially viable unless global scale of operations are adopted. **Global Expansion of Business Operations** Growing market access and movement of capital across countries have facilitated the rapid expansion of business operations globally. Since the comparative advantages of countries strongly influence the location strategies of multinational corporations, companies tend to expand their businesses overseas with the growing economic liberalization. As a result, multinational corporations constitute the main vectors of economic globalization. **Advents in Logistic Management** Besides these, the greater availability of speedier and increasingly cost-effective means of transport, breakthroughs in logistics management such as multimodal transport technology, and third-party logistics management contributed to the faster and efficient movement of goods internationally. **Emergence of global customer segment** Customers around the world are fast exhibiting convergence of tastes and preferences in terms of their product likings and buying habits. Automobiles, fast-food outlets, music systems, and even fashion goods are becoming amazingly similar across countries. The proliferation of transnational satellite television and telecommunication has accelerated the process of cultural convergence. Traditionally, cultural values were transmitted through generations by parents or grandparents or other family members. However, with the emergence of unit families that have both parents working, television has become the prominent source of acculturation not only in Western countries but in oriental countries as well. Besides, advances in the modes of transport and increased international travel have greatly contributed to the growing similarity of customer preferences across countries. Thus, the process of globalization has encouraged firms to tap the global markets with increased product standardization. This has also given rise to rapid increase in global brands. **REGULATORY CONTROLS** The restrictions imposed by national governments by way of regulatory measures in their trade, industrial, monetary, and fiscal policies restrain companies from global expansion. Restrictions on portfolio and foreign direct investment considerably influence monetary and capital flows across borders. The high incidence of import duties makes imported goods uncompetitive and deters them from entering domestic markets. **EMERGING TRADE BARRIERS** The integration of national economies under the WTO framework has restrained countries from increasing tariffs and imposing explicit non-tariff trade barriers. However, countries are consistently evolving innovative marketing barriers that are WTO compatible. Such barriers include quality and technical specifications, environmental issues, regulations related to human exploitation, such as child labour, etc. Innovative technical jargons and justifications are often evolved by developed countries to impose such restrictions over goods from developing countries, who find it very hard to defend against such measures. **CULTURAL FACTORS** Cultural factors can restrain the benefits of globalization. For instance, France's collective nationalism favors home-grown agriculture and the US fear of terrorism has made foreign management of its ports difficult and restrained the entry of the Dubai Port World. **NATIONALISM** The feeling of nationalism often aroused by local trade and industry, trade unions, political parties, and other nationalistic interest groups exerts considerable pressure against globalization. The increased availability of quality goods at comparatively lower prices generally benefits the mass consumers in the importing country but hurts the interests of the domestic industry. On one hand, consumers in general are hardly organized to exert any influence on policy making, while on the other hand, trade and industry have considerable clout through their associations and unions to use pressure tactics on national governments against economic liberalization. **WAR AND CIVIL DISTURBANCES** The inability to maintain conducive business environment with sufficient freedom of operations restricts foreign companies from investing. Companies often prefer to expand their business operations in countries that offer peace and security. Countries engaged in prolonged war and civil disturbances are generally avoided for international trade and investment. **MANAGEMENT MYOPIA** A number of well-established business enterprises operating indigenously exhibit little interest in expanding their business overseas. Besides, several other factors such as resource availability, risks, and the attitude of top management play a significant role in the internationalization of business activities. **[Domestic to Transnational Business: Modes of Entry]** Foreign market entry strategies differ in degree of risk they present, the control and commitment of resources they require and the return on investment they promise. There are two major types of entry modes: 1\) non-equity mode, which includes export and contractual agreements 2\) equity mode, which includes joint venture and wholly owned subsidiaries. The market-entry technique that offers the lowest level of risk and the least market control is export and import. The highest risk, but also the highest market control and expected return on investment are connected with direct investments that can be made as an acquisition (sometimes called Brownfield) and Greenfield investments. **Exporting and importing** The first and the most common strategy to be an international company is: import and export of goods, materials and services. Exporting is the process of selling goods or services produced in one country to other countries. There are two types of exporting: direct and indirect. Indirect export means that products are carried abroad by other agents and the firm doesn't have special activity connected with international market, because the sale abroad is treated like the domestic one. For these reasons it is difficult to say that it is an internationalization strategy. In the case of direct exporting, the firm becomes directly involved in marketing its products in foreign markets. **Licensing** Licensing is another way to enter a foreign market with a limited degree of risk. The international licensing firm gives the licensee patent rights, trademark rights, copyrights or know-how on products and processes. In return, the licensee will: produce the licensor's products, market these products in his assigned territory and pay the licensor fees and royalties usually related to the sales volume of the products. This type of agreement is generally welcomed by foreign public authorities because it brings technology into the country. **Franchising** Franchising is similar to licensing except that the franchising organization tends to be more directly involved in the development and control of the marketing programme. The franchising system can be defined as a system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system. Compared to licensing, franchising agreements tends to be longer and the franchisor offers a broader package of rights and resources which usually includes: equipments, managerial systems, operation manual, initial trainings, site approval and all the support necessary for the franchisee to run its business in the same way it is done by the franchisor. In addition to that, while a licensing agreement involves things such as intellectual property, trade secrets and others in franchising it is limited to trademarks and operating know-how of the business. **Advantages of the international franchising mode are as follows:** - low political risk - low cost - allows simultaneous expansion into different regions of the world - well selected partners bring financial investment as well as managerial capabilities to the operation. **There are also disadvantages of the international franchising mode:** - franchisees may turn into future competitors - demand of franchisees may be scarce when starting to franchise a company, which can lead to making agreements with the wrong candidates - a wrong franchisee may ruin the company's name and reputation in the market - comparing to other modes such as exporting and even licensing, international franchising requires a greater financial investment to attract prospects and support and manage franchisees. **Joint Ventures** Foreign joint ventures have much in common with licensing. The major difference is that in joint ventures, the international firm has an equity position and a management voice in the foreign firm. A partnership between host- and home-country firms is formed, usually resulting in the creation of a third firm. This type of agreement gives the international firm better control over operations and also access to local market knowledge. The international firm has access to the network of relationships of the franchisee and is less exposed to the risk expropriation thanks to the partnership with the local firm. This type of agreement is very popular in international management. Its popularity stems from the fact that it permits the avoidance of control problems of the other types of foreign market entry strategies. In addition, the presence of the local firm facilitates the integration of the international firm in a foreign environment. Strategic alliances A strategic alliance is a term used to describe a variety of cooperative agreements between different firms, such as shared research, formal joint ventures, or minority equity participation. The modern form of strategic alliances is becoming increasingly popular and has three distinguishing characteristics: - they are usually between firms in high-industrialized nations - the focus is often on creating new products and technologies rather than distributing existing ones - they are often only created for short term durations. - Technology exchange - this is a major objective for many strategic alliances. The reason for this is that technological innovations are based on interdisciplinary advances and it is difficult for a single firm to possess the necessary resources or capabilities to conduct its own effective R&D efforts. This is also supported by shorter product life cycles and the need for many companies to stay competitive through innovation. The greatest disadvantage of strategic alliances is the risk of competitive collaboration - some strategic alliances involve firms that are in fierce competition outside the specific scope of the alliance. This creates the risk that one or both partners will try to use the alliance to create an advantage over the other. **Direct investments** In this arrangement, the international firm makes a direct investment in a production unit in a foreign market. It is the greatest commitment since there is a 100% ownership. There are two primary ways for direct investments: firms can make a direct acquisition in the host market or they can develop its own facilities from the ground up and this form is called Greenfield investment. Acquisition has become a popular mode of entering foreign markets mainly due to its quick access. Acquisition is lower risk than Greenfield investment because the outcomes of an acquisition can be estimated more easily and precisely. Greenfield investment is the establishment of a new wholly owned subsidiary. It is often complex and potentially costly, but it is able to full control to the firm and has the most potential to provide above average return. Greenfield investment is high risk due to the costs of establishing a new business in a new country. This entry strategy takes much time due to the need of establishing new operations, distribution networks, and the necessity to learn and implement appropriate marketing strategies to compete with rivals in a new market. Foreign market entry strategies are numerous and imply a varying degree of risk and of commitment from an international firm. In general, the implementation of an international development strategy is a process achieved in several steps. Indirect exporting is often used as the starting point; if the results are satisfactory, more committing agreements are made by associating local firms. **IKEA'S Internationalization Strategy - Adaptation and standardisation problem** The furniture industry is an example of an industry that did not lend itself to globalization before the 1960s. The reasons for that are its features. Furniture has a huge volume compared to its value, relatively high transport costs and is easily damaged in shipping. Government trade barriers also were unfavorable. But IKEA -- company established in the 1940s in a small village in Sweden, has become one of the world's leading retailers of home furnishings. In 2002 it was ranked 44th out of the top 100 brands by Interbrand, topping other known brands such as Pepsi. In 2002, it had more than 160 stores in 30 countries. How did IKEA achieve it? The IKEA business idea is: 'We shall offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.' By the early 1960s the Swedish market was saturated and IKEA decided to expand its business formula outside Sweden. They noted: 'Sweden is a very small country. It's pretty logical: in a country like this, if you have a very strong and successful business, you're bound to go international at some point. The reason is simple---you cannot grow any more. IKEA's internationalization strategy in Scandinavian countries and the rest of Europe has not paid significant attention to local tastes and preferences in the different European countries. Only necessary changes were allowed, to keep costs under control and IKEA's low responsiveness to local needs strategy seems to work well in Europe. The first challenge came in 1985 when IKEA entered the US market and faced several problems there. The root of most of these problems was the company's lack of attention to local needs and wants. US customers preferred large furniture kits and household items. As a result of initial poor performance in the US market, IKEA's management realized that a standardized product strategy should be flexible enough to respond to local markets. In the early 1990s IKEA redesigned its strategy and adapted its products to the US market. Thanks to it, IKEA's sales in the US increased significantly and by 2002 the US market accounted for 19% of IKEA's revenue. As the case study illustrates, in several industries firms with effective strategy do not have to change their core strategy significantly when they move beyond their home market. IKEA does not significantly change its corporate strategy and operations to adapt to local markets unless there is a compelling reason for doing so. IKEA's strategy in the US during the 1980s demonstrates that even the most successful formula in the home market can fail if multinational companies do not respond effectively to local business realities. **Foreign Market Entry Mode Choice: Internal and External Perspectives** When firms enter international markets, two groupings of foreign market entry modes can be identified; namely, exporting and non-exporting. With export entry modes, a firm's products are manufactured in the home country or a third country, and then sent to the host country in a direct or indirect manner. Direct exports involve the firm performing various export tasks such as market research and logistics. Goods are then sold in overseas markets by agents or distributors. Contrary to direct export, indirect export mode involves a firm selling overseas using export houses or trading firms to carry out these tasks. Non-export mode includes a range of deployment other than exporting, such as licensing, franchising, strategic alliances, and foreign direct investment. This mode is different from the export mode in a sense that some forms of knowledge transfer and investments are involved. Foreign market entry mode choice plays an important role in global business and is widely researched without reaching a consensus. Various models have been used to explain the factors that affect foreign market entry mode choice. Dunning's eclectic paradigm (1977; 1988; 1995) provides an integrative framework of the determinants of foreign market entry modes. The paradigm suggests that three independent variables of eclectic paradigm; ownership, internalization, and location advantages (OLI) are the key determinants in explaining why multinational firms expand their global businesses. The eclectic paradigm can explain why multinational firms expand their global operations, but it falls short in providing insights with regard to exactly what factors are involved to achieve one or more of these three advantages, or whether the paradigm equally applies to firms in the service industry and small to medium sized companies. Another model in the existing literature, mainly contributed by Scandinavian scholars, is the Uppsala model. The model proposes internationalization is a process in which global firms increase their levels of international involvement as they gather more information and gain more knowledge about the foreign markets. It is a combination of the internationalization theory and internalization theory. However, this model has been critiqued as lacking in generalization and statistical representativeness, and as overlooking strategic factors. To overcome the shortcoming of the abovementioned two models, some researchers study the impact of strategic variables on the foreign market entry mode choice. This stream focuses upon the importance of strategic factors, rather than resource commitment or solely economic benefits, in foreign market entry mode choice. While all three schools of thought have contributed literature on foreign market entry mode choice, research gaps still exist such as foreign cultural impacts and domestic business experience. This study is expected to provide empirical evidence to fill in these research gaps. The study's general question is, "What are the internal and external factors that affect foreign market entry mode choice?" The direction of this study is to examine firms' internal and external factors that can affect foreign market entry choice by: (1) critically reviewing the literature of foreign market entry choice, (2) identifying research gaps in the existing literature, (3) developing hypotheses, and (4) conducting an empirical survey to test the hypotheses. Two major theoretical perspectives guide this study; resources and capabilities, and institutional perspectives. The resources and capabilities perspective emphasizes the internal issues of the firms when making strategic decisions, while the institutional perspective stresses that firms' international marketing decisions depend on the elements of the external country environment such as culture. These two theoretical perspectives have been used to understand the foreign market entry mode choice in the literature. Literature review in the next section based on these two theoretical perspectives delineates the reasons for including these variables in the model for testing. **Literature review** **Internal Factors: Control** The concept of control in foreign market entry mode is concerned with having strategic and operational decision-making authority. In the foreign market entry mode choice literature, control plays an important role because it is a means of maximizing economic efficiency and return on investment in international markets. Control allows firms to safeguard supplies of essential inputs to the production process, co-ordinate activities, ensure the quality of end products, and influence the logistical and marketing activities for the product in the target foreign market. Firms also make use of various levels of control for reduction of resource commitment with an aim to reducing some forms of risk while increasing their returns. Therefore, focusing on control is consistent with the classical risk-adjusted return perspective. In conclusion, firms can determine their own fate about their branding activities if they maintain the decision-making control. Empirically, a number of studies have analyzed the firm performance in terms of different market entry modes. Other works have tried to rationalize the choice of foreign market entry mode. The general consensus of the empirical works suggests that firms tend to choose non-export mode when control of operation is considered as an important factor. **Internal Factors: Experience** Experience refers to the extent to which a firm has been involved in its international operation in a particular country or from the operation in the international environment in general. International experience of managers and thus of the firm plays an important role in entry mode choice. According to Stopford and Wells (1972), entry mode decision depends on the international experience of the company. Buckley and Casson (1985) argue that experience reduces the cost and uncertainty of serving a market and in turn increases the probability of firms committing resources to foreign market. Johanson and Vahlne (1977) assert uncertainty in international markets is reduced through actual operations in foreign markets, that is experiential knowledge, rather than through the acquisition of objective knowledge. Firms can accumulate new knowledge through network collaboration by drawing upon experiences from various parties involved in the collaboration. Inexperienced firms have been found to overstate the risks and costs of operating internationally and to understate the returns generated from international operation. Consequently, these firms prefer to use exporting mode rather than investment entry mode until their accumulated experience grows to a certain level that reduces their internal uncertainty justifying shifting to entry mode other than exporting. In general, it is direct experience with international markets that increases the likelihood of committing a large amount of resources to foreign markets. Local market knowledge transfer takes place even though it is a complicated process. By using an incremental approach, Japanese firms have been found to build capabilities through experience gained from overseas markets. However, some studies find that experience is not a statistically significant factor in entry mode decisions. A major gap exists in the market entry literature with respect to experience. Studies have focused solely on the firms' international experience without looking at experience gathered from domestic operations. No empirical study has examined the impacts of domestic business experience, which is generated from domestic operation and is later utilized in global business venture, on foreign market entry mode choice. Business literature shows that firms' domestic experience affects their momentum towards repeated acquisition in a host country and the timing of entering the foreign markets. This study is expected to fill this gap in market entry mode choice literature. **Internal Factors: Services Industry** Another internal issue related to market entry model choice is derived from research on the service industry. Internationalization of service firms differs from that of manufacturing firms due to the unique characteristics of services; namely, intangibility, inseparability, heterogeneity and perishability. Empirical findings show that service firms are different from manufacturing firms in choosing market entry mode. Service firms require less investment in physical assets but more in human capital with the consequence of choosing non-export mode. Service firms following their customers overseas are more likely to choose non-export mode. While the empirical findings broadly suggest that service firms tend to choose non-export mode, there is a lack of empirical evidence that includes both cultural and service variables within a logistic regression model. **External Factors: Intensity of Competition** The demand for firms' products and services in international markets is another consideration in deciding market entry mode. The size and growth of host markets have been found to be an important determinant of foreign investment. Dunning (1993) argues that firms seek growth opportunities in international markets when growth in their home markets stagnates or declines. In contrast, some scholars propose that the main reason behind firms' internationalization is to aggressively take advantage of rapid industry growth in the host country. In either case, firms may choose investment mode which provides greater long term profitability to them or the opportunity to establish long term market presence. Prices of the firms' products and services depend on the competitors' activities and the demand for the products and services in the overseas marketplace. From the point of view of strategic management, Harrigan suggests firms tend not to get involved in markets where the intensity of competition is high due to such a markets being less profitable. Therefore, firms opt to adopt exporting and licensing in a competitive market. However, firms entering a new oligopolistic or monopolistic market require sole ownership to compete effectively against the dominant firms (Root, 1994). In summary, firms have higher incentive to commit more resources to attractive markets, with the exception of cases exhibiting the strategic needs mentioned above. Kim and Hwang (1992) empirically test the effects of demand and competitive conditions on firms' mode choice decisions and find that demand uncertainty and competitive intensity are not deterministic in influencing the choice of entry mode. However, a contradictory result, wherein firms facing intensity of competition tend to choose non-export mode has been presented. The contradictory empirical results call for further study on the effect of intensity of competition on market entry mode choice. **External Factors: Socio-Cultural Conditions** Johanson and Vahlne (1977) propose that more economic interaction occurs between socio-culturally similar countries than between socio-culturally dissimilar countries. Socio-culturally similarity can be in the form of business and management practices, a common or similar language and belief, and cultural characteristics. Cultural characteristics are considered as the sum total of knowledge, beliefs, art, morals, laws and customs, and any other capabilities and baits acquired by humans as a member of society. Culture can be classified in four categories: power distance, individualism, masculinity/femininity, and uncertainty avoidance. Power distance is concerned with the attitude of the culture toward inequalities within a society. Individualism represents the extent of interdependence a society maintains among its members. Masculinity/femininity states the polar opposites of the dominant values in a society; masculinity driven by success and femininity concerning with caring for others. Uncertainty avoidance is an indication of how a society deals with the uncertainty of the future. Australia scored low on power distance, high on individualism, high on masculinity and medium on uncertainty avoidance. The results are similar to those of the U.K. and US, but signify big differences when comparing to Asian countries such as Hong Kong and Singapore. Hofstede's culture classification has established a theoretical foundation to study the impacts of culture on business decisions such as foreign entry strategy decisions. Kogut and Singh (1988) suggest cultural differences between home and host countries increase the level of risk in post-acquisition integration with consequence of leading firms to choose less risky entry mode. Their study, using the measurement of a composite index developed by Hofstede (1980), confirm that the greater cultural distance between the investing firm's home country and the host country, the more likely the firm would choose joint venture and green field investment rather than by acquisition. Gatignon and Anderson (1988), using an index developed by Ronen and Shenkar (1985), also posit that high socio-cultural distance relates to a less committed mode of entry. Evans, Mavondo and Bridson (2008) empirically found a negative association between psychic distance and entry strategy. Empirical evidence suggests that Australia managers make market entry mode decisions in different manners to their counterparts in the states and in the U.K. In summary, previous studies provide empirical evidence that socio-cultural factors play a significant role in the choice of firm's foreign market entry mode. However, as Mayrhofer suggests, "the influence of this variable (culture) on entry-mode choice is not clearly established in the international management literature." This study proposes to use a more contemporary cultural measure developed by Wong and Merrilees (2007) to examine its impact on market entry mode choice. **Hypothesis development**Managers' experience strongly affects how they make international marketing decisions and market entry strategy in particular. Uncertainty of overseas markets can be reduced and costs of running overseas operations can be driven down with firms' growing international experience. Consequently, firms are more likely to commit more resources to the foreign markets in relation to their level of experience. When firms involve more in foreign markets, they are able to gain experiential knowledge, which reduces uncertainty in international markets. Inexperience firms tend to underestimate the potential profits from international operations and overstate the risks and costs of international involvements with the consequences of choosing export mode. Firms prefer export mode until there are justifications of doing otherwise. Firms gain knowledge about doing business from their domestic markets. The knowledge in terms of capability development helps build up confidence with the consequence of choosing non-export mode. Thus, **Hypothesis 1: Firms with more business experience tend to prefer the non-export mode of entry to exporting.** Socio-cultural differences between a firm's home country and the targeted market can create uncertainty that in turn affects the selection of entry mode by the firm. Moreover, socio-cultural dissimilarity discourages investment due to the difficulties involved in the transfer of marketing skills, technology, and human resources to socio-culturally different markets. Firms which are unfamiliar with a foreign market with dissimilar cultures endeavor to acquire large amount of information necessary to bridge the cultural gap between the firms' and foreign country. The perceived risks involved in international operations are lower when cultural backgrounds between the home and host countries are similar. As a result, firms tend to choose non-export mode in similar cultural environment. Thus, **Hypothesis 2: Firms more familiar with the cultural backgrounds of the host country tend to prefer the non-export mode of entry to exporting.** Different entry modes imply different levels of control of a firm. Foreign direct investment mode of entry is characterized by higher levels of control and exporting mode by lower ones. Control can facilitate firms in organizing actions, implementing strategies, and handling any disputes among global operation units if conflicts arise. It can also make the implementation of global marketing strategies easier to integrate and coordinate. With high control mode such as foreign direct investment, firms can oversee their global business strategies to ensure that they are carried out in desirable manner. However, control comes with a high cost. Exercising control can force firms to take responsibility and make decisions in uncertain or unfamiliar environments and to commit resources with the consequence of increasing switching costs, reducing the firms' ability to change, and increasing risks. When firms consider controlling their global business activities as not a particularly important issue, they tend to choose export mode. Thus, **Hypothesis 3: Firms with greater intention to control their global business tend to prefer the non-export mode of entry to exporting.** The competitive situations in the global markets can affect firms' strategic decisions. When the competitive situations are intensive in the host markets, firms may need to invest more resources to pass the threshold of and to hold a position in the overseas markets. Profit prospects in intensive competitive markets may not be as bright as those with less competition. Prices may have to be cut to maintain competitive advantage with the consequence of eroding profits. Kim and Hwang (1992) argue that firms prefer market entry mode with low resource commitment in markets with greater intensity of competition. In addition, host governments are equipped with more alternatives, furnishing them with more bargaining power over the global firms in markets with greater competitive intensity. Facing intensive competition in the overseas markets, firms may choose a more conservative entry mode such as exporting. Thus, **Hypothesis 4: Firms tend to prefer the exporting mode of entry to non-exporting when facing intensive competition in the host markets** The service industry is different from the manufacturing industry due to its unique aspects of in intangibility, perishability, heterogeneity, and inseparability of production and consumption. Owning to these unique aspects, service firms make strategic moves such as market entry mode choice different from manufacturing firms. Resources and capability building between the service firms and manufacturing firms are also different. The former cultivate based more on human resources and less on physical equipment or inventory when internationalizing their businesses. With the distinctiveness of services, the service firms may choose a different market entry mode from that of manufacturing firms. Thus, **Hypothesis 5: Service firms tend to prefer the exporting mode of entry to the non-exporting mode.** **[Dimensions and Stages in Globalization]** The development and the usage of technology have opened up the borders of the world and make the economic, political, and cultural globalization easier. These three dimensions of globalization are intertwined to each other seeing that one dimension brings effect to another. Andreas Theophanous, 2011 has referred to four dimensions of globalization in his paper: 1. Economic, 2. Political. 3. Social and 4. Cultural. These four dimensions include different factors such as communications, transportation, technology, population mobility and life style. Furthermore, he asserts that the consequence of each factor might be related to more than one dimension. For example, we make use of a particular dimension, in the first view, it might have economic applications, and meanwhile the technology affects the production, employment and the use of standard and life style. Robert Kcohance and Joseph Nye (2000) have also distinguished four dimensions of globalization that are economic, military, cultural and social. In this chapter, these four dimensions have been considered and examined in detail. **Economic dimension** In definition of globalization, economic perspective is of great importance and is dominant in contrast to political, scientific, cultural and social dimensions. The reason is the evolution of this dimension of globalization rather than other dimensions and time priority. This is why globalization is viewed mostly from economic point of view. The origin of economy globalization and its development is Breton Woods conference in 1944. However, the economy crisis of the 1970s facilitated globalization through creation of new drivers in neoliberal economic ideology and increase of Regan and Thatcher powers. On the other hand, advances in technology that reduced the transportation and communication costs reinforced this trend. One of the other significant factors in development of economic globalization is the role of multinational companies and the emergence of networks of companies which act independent of particular geographical areas or state\'s policies. Globalization is composed of two sub-processes from economic dimension the first one is the merging of distinct and isolated parts of global system which includes the spread of active forces and capital all over the world. Free trade agreements are the main part of this process due to the fact that they make legislation which facilitates the flow of work and capital. The second process is development of communication including telecommunication, internet etc. which facilitate the flow of labor and capital. The agreement on free trade is the main part of this process due to the fact that they make some regulations which facilitate the flow of labor and capital. The second process is the development of communications including telecommunication, internet etc. that all facilitate the intra-national and international relations. Multifaceted trade agreements such as The Genera Tariff And Trade GATT negotiation have led to the formation and construction of World Trade Organization, The North American Free Trade Area and recently, Free Trade Area of Americas, all are part of globalization process. In economic dimension, one of the fundamental goals of globalization is the destruction of economic borders and removal of legal barriers and creation of free market system in a way that make the capitals flow freely. The other point in economic dimension of globalization is the removal of custom duties\' barriers and globalization of competitions. Fukuyama and Hantington are among the proponents of globalization. They consider globalization as a process that leads to evolution and generalization of modern capitalism. **Political dimension** Globalization as a political phenomenon means that the construction of political plays is not determined within distinct and independent units (independent organized structures and hierarchy of states). Therefore, that globalization is the process of political structure. Political globalization is the reconstruction of political experiences and institutionalized structures for coordinating and removing the deficiencies of state. In political dimension, the state as the welfare provider has been removed from most communities under the influence of globalization and because of the reduction of state\'s collaboration in economic section. New groups and leaders have emerged for creating welfare and security. Such leaders are challenging for states and governments. On the other hand, according to some of theorists, globalization reduces the control of states and governments of their nations. So, social liberation, democracy, civil attitudes and political culture are promoted. Despite this, some theorists believe that regardless of cultural or regional differences between states (national economies integration within global market) globalization is a catalyzer for political liberalization of states. However, this idea is rejected by some thinkers of international policy due to the general effect of economy globalization of policy. This can be seen in the reduction of globalization effect in Asian countries (due to their unique political culture). However, one cannot ignore the great effects of globalization in political area within global level. The distribution of cosmopolitism relation, the growth of political culture, the transformation of traditional power of societies to competitive powerful power, the increase in citizen rights and awareness within civil society and institutionalization of liberty in selection within the political development models are a great part of globalization effect in political zone at global level which are mentioned in political dimension in globalization. **Social dimension** Social dimension of globalization is related to the globalization effect on the life and work of individuals, their families and communities. This dimension is related with the effect of globalization on employment, work condition, income and social support. The social dimension beyond labor world refers to security, culture, identity and the coherence of families and communities. Historically, this dimension of globalization is alongside with neoliberal ideology. The changes in the policies facilitated in late 1970s within liberalization framework. The movement from Keynesian economy to monetarist macroeconomic in developed countries which was followed through structural adaptation in developing countries in 1980s and 1990s, their aim was privatization and the increase of global competition which is a tool for making stable and promote civil society. However, in most countries, due to removing of occupational security from middle classes and below, it has reverse effect because of severe social stress. Furthermore, the main effect of globalization that has worried most people all over the world is the possibility of increase in unemployment rate because of joining to organizations like World Trade Organization. **Cultural dimension** The effect of globalization of cultural dimension is different and globalization of culture had different reactions. However, the specification and identity of these reactions depend on those societies where it has occurred, in a way that the reaction of western and modern societies has been different from that of developing countries and especially Muslim countries. Two factors have been effective in this phenomenon: first: the economic and financial effect of globalization and modernity, the emergence of modern consumption goods, the effect of mass media (TV, Satellite, Film and internet...) has been effective. Second one is western values including scientific argumentation, secularism, individualism, freedom of speech, political pluralism, ruling of law, equalization of women and minorities. Theorists have different view toward the influence of globalization on culture. Proponents believe that although globalization leads to integration and removal of cultural barriers, it is an important step toward more stable world and better life for individuals. However, others consider globalization of culture improper due to fear from universal power and the continuance of multinational collaborations with international institutions such as International Monetary Fund (IMF). According to these views, the idea of globalization is controversial form cultural point of view. More specifically, the views toward globalization of culture are based on two theories of convergence and divergence. However, the review of related literature shows three flow of globalization that is indicative of social, cultural and political: Polarization, And Hybridization Homogenization. Homogenization argues that globalization leads to cultural convergence, most discussions such as John Tomlinson's Cultural Imperialism (1991), Reinhold Wagnleitner's 'Coca-Colonization' (1994) And George Ritzer's \'Mcdonaldization' (2001) considers global culture as indicative of capitalism culture, necessarily, the culture which is inclined toward local cultures. Such culture penetrates in global economy. Furthermore, the emergence of transnational elites who are trained with western values and are committed to homeland values, helps in the construction of a dominant culture that is inspired from capitalism values. The proponents of convergence theory assume that as the modernity level increases, the level of structural integration of modernized communities increase, too. On the other hand, the main changes that occur in structural uniformity of culture in modernized communities might lead to similar consequences, innovation, industrialization and modernization affect through converging the effects of technology on all aspects of social life and labor. Polarization theory offers an opposite view against this. Localities react differently due to external powers of the world due to various cultural and historical heritages. Some communities, particularly Muslim communities, resist westernized or American culture. Based on this, the feature of today\'s world is ethno-nationalism and the conflict between cultures. There is cultural dichotomy between western and non- western life styles, east and west, east and Islamic Confucian Axis. Ploralization theorists such as Adler and Bartholomew, 1992; Yuki and Falbe, 1990 argue that the cultural variation and resistance toward western norms assert that pluralism theory provide an interesting and more attractive picture of global culture development. They argue that it is simplistic to assume that behaviors, preferences and tests from all over the world are converging because cultures are changing and conform differently. On the other hand, the third group of theorists that are known as hybridization believes that the previous outstanding theories do not include the complicated and multifaceted global culture. They argue that cultures adapt from one another and combine some elements from different sources within their own particular cultural experiences. Hybridization theory asserts that cultures have some elements and components specific to themselves. New terms such as globalization and hybridization are created for expressing the dynamic relation and link between globalization and localization. These are main dimensions that are of great importance in the examination of the effect of globalization. On the other hand, they are helpful in determining the main discussion of this chapter which is the examination of the effect of globalization on innovation; this will be focused in what follows. **[Stages in Globalization]** 1. **Domestic Company** Market potential is limited to the home country. Production and marketing facilities are located at home only. Surplus may or may not be exported. There are no overt efforts to develop foreign markets. It may add new product lines, serve new local markets but whole planning is limited to national markets only. **Features:** 1. Their focus remains with domestic market. 2. Their productions facilities remain based in home country.Their analysis is focused on the national market. 3. They do not think globally and avoid taking risk in going global. 4. Their top management may have traditional kind of business management competency and less global expertise. 5. They perceive that there is risk in expanding into global market and thus they try to play safe and satisfied with whatever gains they are getting in domestic market. **2. International Company** Some ambitious efficient domestic companies after going beyond their domestic marketing capacities start thinking of expanding their operations in International Markets.The main strategies for entering international market is: a\) Off-shoring/global outsourcing (seeking cheaper source of raw material or labour) b\) Exporting c\) Licensing d\) Franchising e\) Joint Ventures/Acquisitions f\) Direct Investments Even though they think of international markets, still they are of ethnocentric or domestic oriented. These companies adopt the strategy of locating the branches of their companies in other countries and practice the same domestic operations in foreign markets,including the same promotion, price, product etc. policies. **Features:** 1. Focus on going beyond domestic 2. Their management remains ethnocentric with a vision to expand internationally. They extend their domestic products, domestic prices and other business practices to foreign countries. 3. They keep their marketing mix constant and extend their operations to new countries. 4. Their management style remains centralized for their home nation and extended top down to the overseas market country. **3. Multinational Company** After sometime, international companies realize that the domestic model and practices adopted through extension policies do not serve the purpose. The foreign customers may not prefer the products that are sold in domestic market. Hence, these companies respond to the needs of different customers in different countries and produce such goods and services that will satisfy them. **Features:** 1. Companies when they spread their wings to more nations become multinational companies. 2. Sooner or later they realize that they have to change their marketing mix according to the foreign market. 3. This can also be termed as multi domestic, in which different strategies are adopted for different market. 4. The management of such companies remains decentralized and even production may be in the host country. 5. Performance evaluation is done at different host countries. **4. Global** The global company adopts global strategy for marketing its products. It may produce either in the home country or in any other single country and market its products throughout the world. It may also produce the products globally and market them domestically. **Features:** 1. Such companies have a global marketing strategy. 2. They either produce in home country or in a single country and focus marketing globally. 3. They adapt to the market conditions according to the foreign market. 4. Their performance evaluation is done worldwide. **5. Transnational Company** Transnational Company operates at the global level by way of utilizing global resources to serve the global markets. It has geocentric orientation and has integrated network. Its key assets are dispersed and every sub-unit of the company contributes towards achievement of the company objectives. It produces best quality raw materials from the cheapest source in the world,process them in the country wherever it is economical and sells the finished products in those markets where prices are favourable. **Feature:** 1. Transnational companies have a geocentric approach,which means they think globally and act locally. 2. Transnational companies collect information worldwide and scan it for use beyond geographical boundaries. 3. The vision of such to grow more in a global way. 4. The R&D, management, product development are shared worldwide. 5. Their human resources procurement and development remains globally. **[Characteristics of Multinational Corporations (MNCs)]** **Giant Colossal Size:** The business (sales volume) and asset holdings of multinational corporations runs in multiple billions. To exemplify, General Electric (GE) and General Motors globally known US giants. Similarly, Royal Dutch Shell and Mitsui are respectively UK/Netherlands and Japan based organizations. In fact, the asset holdings of some of the multinational corporations exceeds the GDP of certain countries. **International Presence/Operations:** A multinational corporation has wide (global) presence in various host countries, which operate via parent corporation based in the home country. The host country may have a branch or subsidiary in the parent country and is called 'affiliate'. The parent company control over the affiliate may range from 20 to up to 100 percent. **Oligopolistic Structure:** Due to large size and widespread presence, these companies are unable to control the market completely through merger or takeover. Thus, these companies become oligopolistic in nature. **Shared or Transfer of Resources:** In a multinational corporation, various resources are collectively transferred, in form of so-called package. These include raw material, machinery, equipment, technical know-how, manpower to enlist a few. **Growth:** Multinational corporations are marked by rapid expansion and growth, due to presence of business opportunities in host countries and wage differences between parent and host country. **Some of the other features of MNCs are:** - - - **How does a Multinational Corporation (MNC) Works?** A multinational corporation, or multinational enterprise, is an international corporation that derives at least a quarter of its revenues outside its home country. Many multinational enterprises are based in developed nations. Multinational advocates say they create high-paying jobs and technologically advanced goods in countries that otherwise would not have access to such opportunities or goods. However, critics of these enterprises believe these corporations have undue political influence over governments, exploit developing nations, and create job losses in their own home countries. The history of the multinational is linked with the history of colonialism. Many of the first multinationals were commissioned at the behest of European monarchs in order to conduct expeditions. Many of the colonies not held by Spain or Portugal were under the administration of some of the world\'s earliest multinationals. One of the first arose in 1660: The East India Company, founded by the British. It was headquartered in London, and took part in international trade and exploration, with trading posts in India. Other examples include the Swedish Africa Company, founded in 1649, and the Hudson\'s Bay Company, which was incorporated in the 17th century. A large majority of high revenue companies in the U.S. are multinational. **Types of Multinationals** There are four categories of multinationals that exist. They include: - A decentralized corporation with a strong presence in its home country. - A global, centralized corporation that acquires cost advantage where cheap resources are available. - A global company that builds on the parent corporation's [R&D](https://www.investopedia.com/terms/r/randd.asp). - A transnational enterprise that uses all three categories. There are subtle differences between the different kinds of multinational corporations. For instance, a transnational---which is one type of multinational---may have its home in at least two nations and spread out its operations in many countries for a high level of local response. Nestlé S.A. is an example of a transnational corporation that executes business and operational decisions in and outside of its headquarters. Meanwhile, a multinational enterprise controls and manages plants in at least two countries. This type of multinational will take part in foreign investment, as the company invests directly in host country plants in order to stake an ownership claim, thereby avoiding transaction costs. Apple Inc. is a great example of a multinational enterprise, as it tries to maximize cost advantages through foreign investments in international plants. According to the [Fortune Global 500 List](https://fortune.com/global500/search/), the top five multinational corporations in the world as of 2019 are based on consolidated revenue were Walmart (\$514 billion), Sinopec Group (\$415 billion), Royal Dutch Shell (\$397 billion), China National Petroleum (\$393.01 billion), State Grid (\$387 billion). **[Role of MNC]** The process of economic integration has accelerated remarkably in the last 20 years. All three main channels of economic globalization, trade, foreign direct investment (FDI) and the international transfer of knowledge and technology, have developed very dynamically. Amongst them, the strong rise of FDI has attracted the most attention, but the increase of international technology transfers is as impressive. International trade continues to grow stronger than world output. The degree of openness has surpassed the pre World War One record levels in many countries. Multinational Enterprises (MNEs) stand at the center of all of these developments. FDI, which is by definition bound to MNEs, is analyzed in the first part of this paper. Long-term developments are characterized as well as sectoral and regional distributions. The second part deals with the international transfer of knowledge and technology. MNEs are the main vehicle of this transfer as can be seen by the 80% of the payments for royalties and license fees, which flew between foreign affiliates and their parent companies in 1995 (UNCTAD 1997). The third part will focus on international trade, especially MNE related international trade. Two phenomena will be of special interest: the large and increasing intra-firm trade and the role of MNEs in trade of intermediate goods. The fourth part concludes from this empirical analysis the need to make the enterprise, not the country, the basic unit of analysis. Economic globalization must be examined in a theoretical framework of imperfect competition. **1. Foreign Direct Investment** The deepening of worldwide economic integration has depended increasingly on rising FDI flows, especially in the last two decades. Up to the mid-nineteen eighties, foreign trade was the most dynamic channel of economic integration. Exports grew much stronger than FDI in the 1950s, 60s and 70s. In the 1980s this pattern changed. 16.3% FDI growth exceeded the 6.2% export growth per year by far. The increasing integration through stronger growth in trade relative to production and the impressive rise of FDI after 1985 is documented in Figure 1. World real industrial production has risen by 60% over this 24 years period. That is an annual growth rate of 2%. International trade, here shown by the export figures, has increased by 210% over the whole period, or 4.8% annually, more than twice as fast as industrial production. An even more dynamic contribution to economic integration came from FDI. From 1973 to 1997, FDI has increased by 780%. That is an impressive annual growth rate of 9.5%, twice as large as the export growth rate. Figure 1: World Industrial Production, World Trade and Foreign Direct Investment, 1973--1997a ![](media/image2.png) The sudden and strong increase of FDI in the second half of the 1980s has been often noticed and widely discussed in recent years, but its explanation remains to be one of the challenges to economic research (Graham 1996). Worldwide FDI stocks increased from \$ 782 billion to \$ 1,768 billion in the second half of the eighties. They more than doubled, therefore, in just six years (Table 1). Worldwide FDI continued to grow in the 1990s. In 1998 the world FDI stock reached \$ 4,088 Billion. Roughly three quarter were invested in developed countries. Especially the FDI boom in the second half of the 1980s was an OECD countries phenomenon. Approximately 85% of the flows had developed countries as source and as host of FDI (Table 2). In the last decade the share of FDI received by developing countries has been somewhat higher. This higher share results from a FDI boom in China and South-East Asia in the first half of the 1990s. China alone received 12% of all FDI inflows worldwide, or one third of all inflows in the developing countries in 1996, South-East Asia another third. After the Asian crisis the strong increase of FDI was mainly driven by a cross-border merger and acquisition wave among developed countries, which increased their share of total FDI inflows to 73.5% in 1999 (UNCTAD 2000). ![](media/image4.png) The share of FDI inflows in the United States increased from 18% in the early 1970s to 40% in the late 1980s. The U.S. experienced the most impressive increase and became by far the largest host country. An interesting picture emerged in the second half of the 1980s with one dominant host country and many large home countries of FDI (Table 3). That was the opposite of the situation in the 1960s and the early 1970s when U.S. companies dominated FDI outflows by investing heavily in other developed countries. The share of world FDI outflows coming from U.S. companies dropped from more than half in the early 1970s to 15% in the second half of the 80s. It recovered again in the 1990s, without regaining its dominant position of the 60s. In the last decade, U.S. outward FDI share has risen again to 26%. And, the country has continued to be the most important host of FDI although the dominance faded a bit, mostly due to the emergence of China as a large recipient of FDI in the 1990s. The differences in the growth rates of inward FDI reflected in Table 1 and 2 result from the devaluation of the U.S. \$ after 1985. For FDI statistics' problems compare Klodt (1999). Note that U.S. outward FDI flows experienced only a relative decline in the 1980s, U.S. companies outward FDI flows doubled the early seventies to the late eighties. However, the increase in other developed countries, most notable Japan and the United Kingdom was much larger. The relative fall of U.S. outward FDI would be even larger when adjusted for the higher rate of reinvested earnings in U.S. outflows in the 1980s (Table 4). The high share of reinvested earnings in FDI outflows of the U.S. and the U.K. points to the longer history of internationalization of production of companies in these countries as compared to Japan, Germany and France. Germany's drop in the reinvested earnings ratio can be explained by the strong increase of outflows which could not have been financed by reinvested earnings alone. ![](media/image6.png) The reason for the change in relative positions in FDI among developed countries is not well understood. The drastic change in the U.S. current account does not seem to be the cause, since net FDI flows and the balance of the current account are not correlated for the United States as well as for the other analyzed countries with the possible exception of Japan (Table 5). Tables 1 to 4 and Figure 2 point to another phenomenon, i.e. the cyclical behavior of FDI flows. Knickerbocker (1973) was the first to notice that FDI tends to occur in sectoral and temporal clusters. Flowers (1976), while testing Knickerbockers theory of oligopolistic reaction, found country-specific temporal and sectoral FDI clusters. Investments from different countries occur at different times. The clustering of investments disappeared when various countries were examined. Investors only seem to react to activities of their national competitors. ![](media/image8.png) Since booms and droughts do not occur at the same time in different countries, the aggregated world FDI outflow series is much smoother, although booms and recessions are observable in world FDI outflows, too. So far, oligopolistic reaction is the theory used to explain the wave behavior, in spite of some shortcomings. Kleinert (1999) gives another explanation for the wave behavior within a general equilibrium model of the emergence of MNEs. According to his work, waves result from changes in the competitive conditions induced by FDI of a national competitor. Although this approach receives some support from the empirical results of Flowers (1976), it has not been tested empirically yet. The large share of intra-industry FDI is another striking phenomenon. Cantwell and Sanna Randaccio (1992) presented large and increasing shares of intra-industry direct investment in the EU. Furthermore, they show that FDI often takes place in technology-intensive industries. This points to imperfect competition models as explanation for FDI activity, rather than perfect competition models. 2\. International Transfer of Knowledge and Technology The international transfer of knowledge and technology, measured here as payments for royalties and licensing fees, rose at about the same rate as FDI flows in the last two decades. Technology payments increased from \$ 12 billion in 1983 to \$ 65 billion in 1999 (UNCTAD 1997, 2000). The annual growth rate of 11.1% in the 1990s even exceeded FDI outflow growth (9.9%). The parallel increase could be a first hint to the dominant role of MNEs in the international transfer of knowledge and technology. The regional distribution of royalties and license fees payments (Table 6) is more strongly dominated by developed countries than the regional structure of inward FDI stocks (Table 1). This is not surprising, given the advantage of MNEs in the production of technology intensive goods and their larger capacity to develop and absorb new technologies. A large share of all payments for the use of imported technology comes from developed countries. The regional concentration is even stronger on the receipts side of royalties and license fees. The U.S. alone received about 58% of all royalties and license fees in the 1990s, Japan, the U.K., Germany and France 10%, 9%, 6% and 4%, respectively. These large players hold strong positions in payments as well as in receipts of royalties and license fees. According to UNCTAD data, international transfer of technology takes place almost without developing countries. Developed countries account for 98,3% of all receipts and 88.3% of all payments. Among the developing countries, South Korea holds the highest shares, with one third of the payments and one fifth of the receipts within the developing countries group. A high share of technology flows are intra-firm flows (Table 7). Using data from the U.S., Japan and Germany, UNCTAD (1997) calculated this share to be about 80% of all flows. That shows the important role of MNEs to overcome market imperfections on markets for information goods. Further, this 80% share documents the internalization advantage, which, according to the OLI paradigm (Dunning 1980), is necessary for a MNE to be superior to a licensing agreement with an independent foreign company. The intra-firm share in Table 7 is biased downwards, because the numbers of cross-border royalties and license fees include payments for copyright of software, books, film, live entertainment and other consumer to business fees, which cannot be internalized within a firm. The intra-firm share in business-to-business knowledge transfers is larger than 80% and did not fall in the 1990s. The falling share in the last decade which is given in Table 7 results exclusively from increasing importance of technology payments in the business-consumer-relationship. ![](media/image10.png) Table 6 shows the rise of international technology flowing in the globalization era. New knowledge and technology is spread almost immediately to other developed countries. This phenomenon can also be observed from patent applications given in Table 8. Increasingly, patents are applied for not only to the authorities of the "home country" but to external authorities, too. However, patent applications are costly. Therefore, applications in foreign countries point to a reduction of other sources which used to protect knowledge as information asymmetries between companies from different countries. Furthermore, it may point to a faster penetration of foreign markets not only by exports but also by production in foreign countries. The importance of knowledge production, here proxied by the number of resident patent applications has increased in all three economies over the last two decades. This fact and the internationalization of the use of this knowledge have led to a rising internationalization of knowledge protection. In 1997, an U.S. company applied (on average) for a patent in the United States and in 13 other countries, compared to two other countries in 1980. In the same vein, the foreign share of national applications has grown in all three countries. Increasing international technology flows are protected by a rising number of patents given by foreign countries authorities. That does not say anything about the internationalization of knowledge production, but about the internationalization of the use of knowledge. The internationalization of knowledge production has not kept pace with the globalization of trade and production. Even large companies in most cases perform most of their R&D at home. On an aggregated level, only U.S. data are available. Table 9 points to growing R&D activities of foreign affiliates of U.S. MNEs in absolute numbers but a rather constant share of these activities in the whole expenditure for R&D of U.S. MNEs at about 10%. Globalization includes increasing international flows of knowledge and technology but not the internationalization of knowledge production on a large scale. Knowledge production remains a task predominantly performed in the home country. The large and rising flows of knowledge from the home country to the host countries (Table 6) reflect the dependence of the internationalized production on the headquarter service research and development which is supplied by the parent company. U.S. parent companies received royalties and license fees of 23.3 billion \$ in 1999 but bought technology for 2.0 billion \$ only. U.S. affiliates of foreign MNEs received 7.7 billion \$ and paid 1.6 billion \$ (Bureau of Economic Activities 2000a, 2000b). Foreign R&D activities often focus on the application of production processes and goods on the conditions in the foreign market. ![](media/image12.png) One phenomenon of globalization is the rising speed at which new know-how and technology spreads over national borders, especially among developed countries. MNEs are the most important vehicle of international knowledge transfer. Intra-firm transfers of technology account for a very large share of technology flows. However, the internationalization of knowledge production has not increased significantly over the last two decades. The headquarter service knowledge is produced at home and exported to the foreign affiliates of a MNE. Growing trade in headquarter services contributes to the rise in trade in services. **3. International Trade** Traditionally, trade has been the most important channel of the integration of the world economy. It has been only very recently, that the strong rise in FDI challenges the role of trade in goods and services as the most important aspect of globalization. Since the end of World War II, international trade has pushed world economic integration. Its growth rates have exceeded production growth rates by far, pointing to a deepening of integration (Figure 1). Merchandise exports have almost tripled in nominal terms since 1980. Like FDI flows and the transfer of know-how and technology, trade takes place mostly among developed countries (Table 10). Their merchandise export share have remained relatively stable at about two third over the last two decades. The emergence of the Asian exporting countries has not changed this dominance of the developed countries. Trade in services has grown a bit faster than trade in goods. Its share in total trade has risen marginally to about 20% (WTO various issues) in 1999. A large share of trade especially between developed countries takes place within the same industry. These high intraindustry trade (IIT) shares are mainly explained by imperfect competition in world markets. Companies sell differentiated - not homogenous -- goods in an environment which includes trading and other transaction costs. The development of a new group of international trade models, the new trade theory, was motivated by the empirical findings of the composition of trade, especially these high IIT shares. Comparative advantages are not seen as the driving force behind IIT, although advantages which result from technological differences can also explain intra-industry trade. Table 11 shows IIT-shares of Germany and its most important trading partners on basis of bilateral trade volumes. The IIT share of German trade with European countries is especially high. With France, Germany's largest trading partner, it even exceeded 80% in 1996. High trade volumes seem to be related to high IIT shares. The rank correlation coefficient between the IIT share and the volume of bilateral German trade with its 13 European trading partners is 0.94, which exceeds the critical value of 0.55. ![](media/image14.png) These high IIT shares result at least partially from trade in intermediate goods. Import of intermediate goods and raw materials make up for approximately half of all imports in developed economies. This is in part due to differences in the endowments with commodities among the countries. Raw material processing industries as wood products and furniture, paper and paper products, petroleum and coal products, nonmetallic mineral products, iron and steel and non-ferrous metals are especially import dependent. The share of imported inputs, mainly raw materials, in total imports in these industries is very high as seen in the third column of Table 12. But for manufacturing sectors as non-electrical machinery, professional goods, or motor vehicles, where the production process is likely to be less raw material dependent, the share of imported input in total input is very high also, with approximately 50% (fourth column of Table 12). The most interesting group for this paper is the one which is called here technology intensive industries. The largest share of inputs in the production of goods in these industries usually comes from the same industry. Their production process involves many different stages, with different requirements. Reasons for the import of intermediates can be manifold. Of course, availability is a motive for trade. Differences in factor content could be a reason to import some parts from countries with comparative advantages for the production of this input. Technological leadership of a company in a foreign country can be another reason to import the intermediate input. Furthermore, established networks can be the source of increasing intermediate trade when companies internationalize their production. Table 13 shows the change of the imported inputs share of the technology intensive sectors over the 1970s and 1980s.2 The share of imported inputs to total imports of these technology intensive sectors kept stable at about 50% over the 1970s and 80s. Only in the United Kingdom the share increased noticeable from the lowest level of all countries. It converged to levels of other OECD countries. The trade in intermediate goods in these sectors increased, therefore, as fast as total trade. Since total trade has experienced a strong increase in the last three decades and has grown faster than production, imported inputs used in production have increased relative to domestic inputs. Table 14 shows imported intermediate inputs as share of total intermediate goods which are used in production, compared to its share in total imports which was shown in Table 12 and 13. ![](media/image16.png) Table 14 shows large national differences. Small countries tend to rely much more on imported inputs than large countries do. Due to economies of scale, large countries can support every stage of production in many differentiated goods more easily than small countries. This could explain the low import shares of intermediate goods used in production in the United States, Japan and Germany. Especially Germany's low share is surprising since it is situated in an integrating area with generally high trade volumes and a distinct separation of labor. Australia suffers from its geographical 'isolation', which lowers the degree of openness. The import share of intermediate goods used by companies in these nine countries has increased from 14.2% in the early 1970s to 19.3% in 1990. That is an increase of 36 per cent in 20 years. This figure indicates a higher integration of these countries into the world economy in the 1990s than in the 1970s. Larger imports of intermediate goods could be the link between larger foreign production and larger international trade. With increasing FDI stocks, the share of production which takes place in foreign affiliates of MNE has been on the rise, too. Affiliates' sales in foreign countries overtook exports in the late 1970s and have continued to grow at higher rates). Sales of foreign affiliates give the upper bound of "foreign production" since they include sales of "pure" sales units, which import finished goods and sell them to local consumers. Sales minus intra-firm exports give the lower bound. All intra-firm exports are thought of as finished goods' exports, value added generated by processing intra-firm intermediated exports by foreign affiliates is not accounted for. ![](media/image18.png) The expanding MNE network, connected through intense trade relations between parent companies and affiliates and among the affiliates, could be the explanation for growing trade and growing production abroad. Substitution of exports by foreign production may occur but new trade opportunities are also opened up with the internationalization of production. In 1994, more than half of all U.S. American MNEs intra-firm exports were exports in intermediate goods (Bureau of Economic Analysis 1998), the intermediate goods share of about two-thirds of total exports of Swedish MNEs in 1990 was even higher. The increase in intra-firm trade volume is well-documented fact. UNCTAD (1998) estimated the intra-firm trade share of total trade to be about one third. Table 15 shows the rising share of U.S. MNE intra-firm trade in the last 20 years. In contrast, intra-firm exports of U.S. affiliates of foreign MNEs decreased in its share in the total U.S. exports from 11.6% in 1982 to 8.4% in 1998. That slowed the increase in the total intra-firm export share. In 1998 35.6% of U.S. exports were intra-firm exports compared to 33.5% in 1982 (Bureau of Economic Analysis various issues). However, the role of MNEs in trade is larger than the 35% intra-firm trade. About 65% of total U.S. exports in 1998 have been related to U.S. MNEs, i.e. at least one of the trading partners belonged to an U.S. MNE. Adding the 8% U.S. exports which are due to foreign MNEs intra-firm trade gives the lower bound of the role of MNEs on U.S. exports. The role of U.S. and foreign MNEs in U.S. imports with at least 61% in 1998 is almost as important. MNEs hold an important position in international trade. Approximately a third of world wide trade takes place within MNEs, about 80% involve at least one MNE at one side of the transaction. This trade is increasingly intraindustry trade and consists to a half of intermediate goods trade. International trade is concentrated on the developed countries which intensified their trade relations as can be seen by a stronger rise of trade relative to production. Globalization is a process which converts separate national economies into an integrated world economy. This includes a deepening and a widening of economic integration. The widening results from the inclusion of new countries like the developing countries of Latin America or the former socialist countries in Central and Eastern Europe in the global economic system. The deepening, on which this paper is focused, predominantly takes place among the developed countries. The intensive use of three channels gave economic integration in the era of globalization a new quality: international trade, foreign direct investment and international technology flows. Internationalization of economic activity is driven to a large extent by MNEs. At least 80% of all international trade is related to at least one MNE. A third takes place within MNEs. A large share of it is intra-industry trade between developed countries. That includes a large share of trade in intermediate goods. The same holds for FDI, which is strongly concentrated on developed countries. Intra-industry investment is also large and concentrated in some industries. FDI flows are more volatile than trade flows. FDI occurs in waves with different cycles for different countries. The concentration on developed countries is strongest in technology flows. Their increase, driven by intra-MNEs flows, which account for 80% of all flows of technology, points to the internationalization of knowledge and technology use. However the internationalization of knowledge production remains rather modest. Research and development remains a headquarter service which is supplied by the parent company and applied by foreign affiliates. The dominant role of large players in the globalization process calls for an explicit modeling of MNEs in the globalization process. The existence and importance of large players with room for strategic decisions about trade, FDI, foreign production and technology transfers must be accounted for in analyses of economic globalization. Therefore, an imperfect competition framework is needed. Market imperfections, which are essential for the understanding of MNEs, must be incorporated. Hence, an analysis of globalization should be based rather on proximity-concentration models à la Brainard (1993) and Markusen and Venables (1998) than on factorproportion theories. **[The Environment of International Business]** International managers face intense and constant challenges that require training and understanding of the foreign environment. Managing a business in a foreign country requires managers to deal with a large variety of cultural and environmental differences. As a result, international managers must continually monitor the political, legal, socio-cultural, economic, and technological environments. **The political environment** The political environment can foster or hinder economic developments and direct investments. This environment is ever‐changing. As examples, the political and economic philosophies of a nation's leader may change overnight. The stability of a nation's government, which frequently rests on the support of the people, can be very volatile. Various citizen groups with vested interests can undermine investment operations and opportunities. And local governments may view foreign firms suspiciously. Political considerations are seldom written down and often change rapidly. For example, to protest Iraq's invasion of Kuwait in 1990, many world governments levied economic sanctions against the import of Iraqi oil. Political considerations affect international business daily as governments enact tariffs (taxes), quotas (annual limits), embargoes (blockages), and other types of restriction in response to political events. Businesses engaged in international trade must consider the relative instability of countries such as Iraq, South Africa, and Honduras. Political unrest in countries such as Peru, Haiti, Somalia, and the countries of the former Soviet Union may create hostile or even dangerous environments for foreign businesses. In Russia, for example, foreign managers often need to hire bodyguards; sixteen foreign businesspeople were murdered there in 1993. Civil war, as in Chechnya and Bosnia, may disrupt business activities and place lives in danger. And a sudden change in power can result in a regime that is hostile to foreign investment; some businesses may be forced out of a country altogether. Whether they like it or not, companies are often involved directly or indirectly in international politics. **The legal environment** The American federal government has put forth a number of laws that regulate the activities of U.S. firms engaged in international trade. However, once outside U.S. borders, American organizations are likely to find that the laws of the other nations differ from those of the U.S. Many legal rights that Americans take for granted do not exist in other countries; a U.S. firm doing business abroad must understand and obey the laws of the host country. In the U.S., the acceptance of bribes or payoffs is illegal; in other countries, the acceptance of bribes or payoffs may not be illegal---they may be considered a common business practice. In addition, some countries have copyright and patent laws that are less strict than those in the U.S., and some countries fail to honor these laws. China, for example, has

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