Week 1-3 Unit Learning Outcomes (ULO) PDF

BIG PICTURE A Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to: a. Understand the nature, basic concepts and roles of international business and trade, determine the participants of international business and to understand why did some of the firms eng...

BIG PICTURE A Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to: a. Understand the nature, basic concepts and roles of international business and trade, determine the participants of international business and to understand why did some of the firms engage in internationalization. Big Picture in Focus: ULOa. Understand the nature, basic concepts and roles of international business and trade, determine the participants of international business and to understand why did some of the firms engage in internationalization. Metalanguage The following are terms to be remembered as we go through in studying this unit. Please refer to these definitions as supplement in case you will encounter difficulty in understanding the basic concepts of international business and trade. 1. International Business and Trade - consists of transactions that are devised and carried out across national borders to satisfy the objectives of individuals, companies, and organizations. 2. Foreign Direct Investment - is a company’s physical investment such as into the building and facilities in the foreign country, and acts as a domestic business with a full scale of activity. Companies practice FDI to get benefits from cheaper labor costs, tax exemptions, and other privileges in that foreign country. 3. Globalization - the process by which businesses or other organizations develop international influence or start operating on an international scale. Essential Knowledge The following are basic concept of international business and trade that may be useful for you to understand this field of expertise. The said concepts might be confusing or difficult as a beginner but at the later part of this unit would be of great help for you to understand the nature of its existence. Please note that you are not limited to exclusively refer to these resources. Thus, you are expected to utilize other books, research articles and other resources that are available in the university’s library e.g. ebrary, search.proquest.com etc., and even online tutorial websites. 1. INTERNATIONAL BUSINESS AND ITS ELEMENTS International business refers to the overall performance of the trade and investment activities of firms across national borders. Since this emphasizes crossing boundaries from one country to another, we also coin international business as cross- border business. Firms organize, source, manufacture, market, and conduct other value-adding activities on an international scale. They seek foreign customers and engage in collaborative relationships with foreign business partners. Firms and nations exchange many physical and intellectual assets, including products, services, capital, technology, know-how, and labor. International business is characterized by six major dimensions. A. International Trade B. International Investment C. International Business Risks D. Participants E. Foreign Market Strategies F. Globalization of Markets Although trading across borders has been around for centuries, contemporary international business has gained much momentum and complexity over the past four decades. Firms seek international market opportunities more than ever before. Like Vodafone, international business affects the everyday lives of people worldwide. Daily activities such as shopping, listening to music, watching a movie, or surfing the Internet involve interactions and transactions that connect you to the global economy. Internationalization of business gives you access to products and services from around the world. It profoundly affects your quality of life and economic well-being. Modern online platforms such as Amazon, Alibaba, Facebook, and Instagram are also expressions of ongoing economic integration and growing interdependency of countries worldwide, known as the globalization of markets. Globalization is a macro- trend of intense economic interconnectedness among the nations of the world. A parallel trend is the ongoing internationalization of countless firms and dramatic growth in the volume and variety of cross-border transactions in goods, services, and capital flows. Internationalization refers to the tendency of companies to deepen their international business activities systematically. It has led to widespread diffusion of products, technology, and knowledge worldwide. 2. WHAT ARE THE KEY CONCEPTS IN INTERNATIONAL BUSINESS International trade describes the exchange of products (merchandise) and services (intangibles) across national borders. Exchange can occur through exporting, the sale of products or services to customers located abroad from a base in the home country or a third country. Exchange also can take the form of importing or global sourcing—the procurement of products or services from suppliers located abroad for consumption in the home country or a third country. While exporting represents the outbound flow of products and services, importing is an inbound activity. Both finished products and intermediate goods (for example, raw materials and components) can be imported and exported. International investment refers to the transfer of assets to another country or the acquisition of assets in that country. Economists refer to such assets as factors of production; they include capital, technology, managerial talent, and manufacturing infrastructure. Trade implies that products and services cross national borders. By contrast, investment implies that the firm itself crosses borders to secure ownership of assets located abroad. The two essential types of cross-border investment are international portfolio investment and foreign direct investment. International portfolio investment refers to the passive owner- ship of foreign securities such as stocks and bonds to gain financial returns. It does not entail active management or control over these assets. The foreign investor has a relatively short-term interest in the ownership of these assets. Foreign Direct Investment (FDI) is an internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as land, plant, equipment, capital, and technology. It is a foreign-market entry strategy that gives investors partial or full ownership of a productive enterprise typically dedicated to manufacturing, marketing, or management activities. Investing such resources abroad is generally for the long term and involves extensive planning. 3. THE NATURE OF INTERNATIONAL TRADE Overall, export growth has outpaced the growth of domestic production during the past few decades, illustrating the fast pace of globalization. GDP is defined as the total value of products and services produced in a country in the course of a year. Following a 27-year boom, world trade declined in 2009 due to the global recession. However, trade revived and returned to normal levels by 2012. Trade was a key factor reducing the impact of the global recession. What is remarkable is that, since 2008, the annual rate of growth in world exports surpassed that of world GDP by almost a factor of two (5.4 versus 2.8 percent). Three factors have been especially notable in explaining why trade growth has long outpaced GDP growth. First is the rise of emerging markets during the past three decades. These rapidly developing economies are home to swiftly growing middle-class households possessing substantial disposable income. Second, advanced (or developed) economies such as the United States and the European Union are now sourcing many of the products they consume from such low-cost manufacturing locations as China, India, and Mexico. Third, advances in information and transportation technologies, decline of trade barriers, and liberalization of markets all con- tribute to rapid growth of trade among nations 4. THE NATURE OF INTERNATIONAL INVESTMENT Of the two types of investment flows—portfolio investment versus foreign direct investment— we are concerned primarily with foreign direct investment (FDI) in this text because it is the ultimate form of internationalization and encompasses the widest range of international business involvement. FDI is the foreign entry strategy practiced by the most internationally active firms. Companies usually undertake FDI for the long term and retain partial or complete ownership of the assets they acquire. In the process, the firm establishes a new legal business entity in the host country, subject to the regulations of the host government. FDI is especially common among large, resourceful companies with substantial international operations. For example, many European and U.S. firms have invested in China, India, and Russia to establish plants to manufacture or assemble products, taking advantage of low-cost labor or natural resources in these countries. At the same time, companies from these rapidly developing economies have begun to invest in Western markets. In 2008, the Turkish company Yildiz acquired the premium chocolate maker Godiva from U.S.-based Campbell Soup Company in a deal valued at $850 million. In 2014, it paid more than $3 billion dollars to acquire British-based cookie and snack maker United Biscuits. 5. SERVICES AS WELL AS PRODUCTS Historically, international trade and investment were mainly the domain of companies that make and sell products—tangible merchandise such as clothing, computers, and motor vehicles. Today, firms that produce services (intangibles) are key international business players as well. Services are deeds, performances, or efforts performed directly by people working in banks, consulting firms, hotels, construction companies, retailers, and countless other firms in the services sector. International trade in services accounts for about one-quarter of all international trade and is growing rapidly. 6. THE INTERNATIONAL FINANCIAL SERVICES SECTOR International banking and financial services are among the most internationally active service industries. Explosive growth of investment and financial flows has led to the emergence of capital markets worldwide. It resulted from two main factors: the internationalization of banks and the massive flow of money across national borders into pension funds and portfolio investments. In the developing economies, banks and other financial institutions have fostered economic activity by increasing the availability of local investment capital, which stimulates the development of financial markets and encourages locals to save money. International banking is flourishing in the Middle East. For example, the return on equity in Saudi Arabia often exceeds 20 percent (compared to 15 percent in the United States and much less in France and Germany). National Commercial Bank, the biggest bank in the region, calculates that non-interest-bearing deposits comprise nearly 50 percent of total deposits in Saudi Arabia. Banks lend this free money to companies and consumers at high margins. By structuring loans as partnerships, they comply with Islamic rules that forbid banks to pay interest. 7. HOW DOES INTERNATIONAL BUSINESS DIFFER FROM DOMESTIC BUSINESS? Firms operate in countries characterized by distinctive economic, cultural, and political conditions. For example, the economic environment of Colombia differs sharply from that of Canada, the legal environment of Saudi Arabia does not resemble that of Japan, and the cultural environment of China is very distinct from that of Kenya. Not only does the firm find itself in unfamiliar surroundings, it encounters many uncontrollable variables—factors over which management has little control. These factors introduce new or elevated business risks. 8. THE FOUR RISKS IN INTERNATIONALIZATION Globalization is not without risks. When companies undertake international business, they are routinely exposed to four major types of risk, these are cross-cultural risk, country risk, currency risk, and commercial risk. The firm must manage these risks to avoid financial loss or product failures. § Cross-cultural risk occurs when a cultural misunderstanding puts some human value at stake. Cross-cultural risk arises from differences in language,  lifestyles, mind-sets, customs, and religion. Values unique to a culture tend to be long lasting and transmitted from one generation to the next. Values influence the mind-set and work style of employees and the shopping patterns of buyers. Foreign customer characteristics can differ significantly from those of buyers in the home market. Language is a critical dimension of culture. In addition to facilitating communication, language is a window on people’s value systems and living conditions. For example, Inuit (Eskimo) languages have various words for snow, whereas the South American Aztecs used the same basic word stem for snow, ice, and cold. When translating from one language to another, it is often difficult to find words that convey the same meanings. For example, a one-word equivalent to aftertaste does not exist in many languages. Such challenges impede effective communication and cause misunderstandings. Miscommunication due to cultural differences gives rise to inappropriate business strategies and ineffective relations with customers. Cross-cultural risk most often occurs in encounters in foreign countries. However, the risk also can occur domestically, as when management meets with customers or business associates who visit company headquarters from abroad. § Country risk (also known as political risk) refers to the potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country. Country risk includes the possibility of foreign government intervention in firms’ business activities. For example, governments may restrict access to markets, impose bureaucratic procedures on business transactions, and limit the amount of income that firms can take home from foreign operations. The degree of government intervention in commercial activities varies from country to country. Singapore and Ireland are characterized by substantial economic freedom— that is, a fairly liberal economic environment. By contrast, the Chinese and Russian governments regularly intervene in business affairs. Country risk also includes laws and regulations that potentially hinder company operations and performance. Critical legal dimensions include intellectual property protection, product liability, and taxation policies. Nations also experience potentially harmful economic conditions, often due to high inflation, national debt, and unbalanced international trade. § Currency risk (also known as financial risk) refers to the risk of adverse fluctuations in exchange rates. Fluctuation is common for exchange rates—the value of one currency in terms of another. Currency risk arises because international transactions are often conducted in more than one national currency. For example, when U.S. fruit processor Graceland Fruit Inc. exports dried cherries to Japan, it is normally paid in Japanese yen. When currencies fluctuate significantly, the value of the firm’s earnings can be reduced. The cost of importing parts or components used in manufacturing finished products can increase dramatically if the value of the currency in which the imports are denominated rises sharply. Inflation and other harmful economic conditions  experienced in one country may have immediate consequences for exchange rates due to the interconnectedness of national economies. Rising value of the U.S. dollar during 2014 and 2015 relative to most currencies has cut into revenues of U.S. multinational firms such as Apple, Caterpillar, and Pfizer. Procter and Gamble’s Duracell battery business experienced a 31 percent decline in profits due to weaker currencies in its foreign markets. § Commercial risk refers to the firm’s potential loss or failure from poorly developed or executed business strategies, tactics, or procedures. Managers may make poor choices in such areas as the selection of business partners, timing of market entry, pricing, creation of product features, and promotional themes. Although such failures also exist in domestic business, the consequences are usually more costly when committed abroad. For example, in domestic business, a company might terminate a poorly performing distributor simply with advance notice. In foreign markets, however, terminating business partners can be costly due to regulations that protect local firms. Marketing inferior or harmful products, falling short of customer expectations, or failing to provide adequate customer service can also damage the firm’s reputation and profitability. Furthermore, commercial risk is often affected by currency risk because fluctuating exchange rates can affect various types of business deals. The four types of international business risks are omnipresent; the firm may encounter them around every corner. Some international risks, such as global financial disruptions, are extremely challenging. Although risk cannot be avoided, it can be anticipated and managed. Experienced international firms constantly assess their environments and conduct research to anticipate potential risks, understand their implications, and take proactive action to reduce their effects. 9. WHO PARTICIPATES IN INTERNATIONAL BUSINESS? International business requires numerous organizations, with varying motives, to work together as a coordinated team, contributing different types of expertise and inputs. There are four major categories of participants. ü A focal firm is the initiator of an international business transaction; it conceives, designs, and produces offerings intended for consumption by customers worldwide. Focal firms take center stage in international business. They are primarily large multinational enterprises (MNEs; also known as multinational corporations, or MNCs) and small and medium-sized enterprises (SMEs). Some are privately owned companies, others are public, stock-held firms, and still others are state enterprises owned by governments. Some focal firms are manufacturing businesses; others are in the service sector. ü A distribution channel intermediary is a specialist firm that provides various logistics and marketing services for focal firms as part of international supply chains, both in the focal firm’s home country and abroad. Typical intermediaries include independent distributors and sales representatives, usually located in  foreign markets where they provide distribution and marketing services to focal firms on a contractual basis. ü A facilitator is a firm or an individual with special expertise in banking, legal advice, customs clearance, or related support services that helps focal firms perform international business transactions. Facilitators include logistics service providers, freight forwarders, banks, and other support firms that assist focal firms in performing specific functions. A freight forwarder is a specialized logistics service provider that arranges international shipping on behalf of exporting firms, much like a travel agent for cargo. Facilitators are found in both the home country and abroad. ü Governments, or the public sector, are also active in international business as suppliers, buyers, and regulators. State-owned enterprises account for a substantial portion of economic value added in many countries, even rapidly liberalizing emerging markets such as Russia, China, and Brazil. Governments in advanced economies such as France, Australia, and Sweden have significant ownership of companies in telecommunications, banking, and natural resources. The recent global financial crisis led governments to step up their involvement in business, especially as regulators. 10. WHY DO FIRMS INTERNATIONALIZE? There are multiple motives for international expansion, some strategic in nature, others reactive. An example of a strategic, or proactive, motive is to tap foreign market opportunities or to acquire new knowledge. An example of a reactive motive is the need to serve a key customer that has expanded abroad. Specific motivations include the following: A. Seek opportunities for growth through market diversification. Substantial market potential exists abroad. Many firms—for example, Gillette, Siemens, Sony, and Biogen—derive more than half of their sales from international markets. In addition to offering sales opportunities that often cannot be matched at home, foreign markets can extend the marketable life of products or services that have reached maturity in the home market. One example is the internationalization of automatic teller machines (ATMs). The first ATMs were installed in London by Barclays Bank. The machines were adopted next in the United States and Japan. As growth of ATMs began to slow in these countries, they were marketed throughout the rest of the world. There were more than three million ATMs worldwide in 2015; a new one is installed somewhere every few minutes. B. Earn higher margins and profits. For many types of products and services, market growth in mature economies is sluggish or flat. Competition is often intense, forcing firms to get by on slim profit margins. By contrast, most foreign markets may be underserved (typical of high-growth emerging markets) or not served at all (typical of developing economies). Less intense competition, combined with strong market demand, implies that companies can command higher margins for their offerings. For example, compared to their home markets, bathroom fixture manufacturers American Standard and Toto (of Japan) have found more favorable competitive environments in rapidly  industrializing countries such as Indonesia, Mexico, and Vietnam. Just imagine the demand for bathroom fixtures in the thousands of office buildings and residential complexes going up from Taiwan to Turkey. C. Gain new ideas about products, services, and business methods. International markets are characterized by tough competitors and demanding customers with various needs. Unique foreign environments expose firms to new ideas for products, processes, and business methods. The experience of doing business abroad helps firms acquire new knowledge for improving organizational effectiveness and efficiency. For example, Japan’s Toyota refined just-in-time inventory techniques, which other manufacturers and foreign suppliers around the world then applied to manufacturing in their own countries. D. Serve key customers better that have relocated abroad. In a global economy, many firms internationalize to better serve clients that have moved into foreign markets. For example, when Nissan opened its first factory in the United Kingdom, many Japanese auto parts suppliers followed, establishing their own operations there. E. Be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in product sourcing. Companies in extractive industries such as petroleum, mining, and forestry establish international operations where raw materials are located. One example is the aluminum producer Alcoa, which established operations in Brazil, Guinea, Jamaica, and elsewhere to extract aluminum’s base mineral bauxite from local mines. Some firms internationalize to gain flexibility from a greater variety of supply bases. Dell Computer has assembly facilities in Asia, Europe, and the Americas that allow management to shift pro- duction quickly from one region to another. This flexibility provides Dell with competitive advantages over less agile rivals—a distinctive capability that allows Dell to outperform competitors and skillfully manage fluctuations in currency exchange rates. F. Gain access to lower-cost or better-value factors of production. Internationalization enables the firm to access capital, technology, managerial talent, and labor at lower costs, higher quality, or better value. For example, some Taiwanese computer manufacturers established subsidiaries in the United States to access low-cost capital. The United States is home to numerous capital sources in the high-tech sector, such as stock exchanges and venture capitalists, which have attracted many firms from abroad seeking funds. More commonly, firms venture abroad in search of skilled or low-cost labor. For example, the Japanese firm Canon relocated much of its production to China to profit from that country’s inexpensive and productive workforce. G. Develop economies of scale in sourcing, production, marketing, and R&D. Economies of scale reduce the per-unit cost of manufacturing by operating at high volume. For example, the per-unit cost of manufacturing 100,000 cameras is much cheaper than the per-unit cost of making just 100 cameras. By expanding internationally, the firm greatly increases the size of its customer base, thereby increasing the volume of goods it produces. On a per-unit-of- output basis, the greater the volume of production, the lower the total cost.  Economies of scale are also present in R&D, sourcing, marketing, distribution, and after-sales service. H. Confront international competitors more effectively or thwart the growth of competition in the home market. International competition is substantial and increasing, with multinational competitors invading markets worldwide. The firm can enhance its competitive positioning by confronting competitors in international markets or preemptively entering a competitor’s home market to destabilize and curb its growth. One example is Caterpillar’s entry in Japan to confront its main rival in the earthmoving equipment industry, Komatsu. Caterpillar’s preemptive move hindered Komatsu’s international expansion for at least a decade. Had it not acted proactively to stifle Komatsu’s growth in Japan, Komatsu’s home market, Caterpillar would certainly have had to face a more potent rival sooner. I. Invest in a potentially rewarding relationship with a foreign partner. Firms often have long-term strategic reasons for venturing abroad. Joint ventures or project-based alliances with key foreign players can lead to the development of new products, early positioning in future key markets, or other long-term, profit-making opportunities. For example, Black and Decker entered a joint venture with Bajaj, an Indian retailer, to position itself for expected long- term sales in the huge Indian market. The French computer firm Groupe Bull partnered with Toshiba in Japan to gain insights for developing the next generation of information technology. At the broadest level, companies internationalize to enhance competitive advantage and find growth and profit opportunities. Throughout this book, we explore the environment within which firms seek these opportunities, and we discuss the strategies and managerial skills necessary for achieving international business success.