International Business Environments and Operations Global Edition Part One Background For International Business Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Chapter 1 Globalization and International Business Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Chapter Objectives To define globalization and international business and show how they affect each other To understand why companies engage in international business and why international business growth has accelerated To discuss globalization’s future and the major criticisms of globalization To become familiar with different ways in which a company can accomplish its global objectives To apply social science disciplines to understanding the differences between international and domestic business Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Introduction Globalization is the ongoing process that deepens and broadens the relationships and interdependence among countries. International Business is a mechanism to bring about globalization. The term sometimes refers to the integration of world economies through the reduction of barriers to the movement of trade, capital, technology, and people. Throughout recorded history, human contacts over ever-wider geographic areas have expanded the variety of available resources, products, services, and markets. Today, so many different components, ingredients, and specialized business activities go into products that we’re often challenged to say exactly where they were made. Example: Japanese firm Matsushita furnishes the CD player in the Korean-manufactured Kia Sorento. Copyright © 2011 Pearson Education

International Business International business consists of all commercial transactions—including sales, investments, and transportation—that take place between two or more countries Increasingly foreign countries are a source of both production and sales for domestic companies These global activities enable us to get more variety, better quality, or lower prices. Private companies undertake such transactions for profit while governments may undertake them either for profit or for political reasons. Copyright © 2011 Pearson Education

Studying International Business is Important Most companies are either international or compete with international companies Modes of operations may differ from those used domestically The best way of conducting business may differ by country An understanding helps you make better career decisions An understanding helps you decide what government policies to support Global events affect companies of all sizes and industries. As a manager in almost any industry, you’ll need to consider both (1) where to obtain the inputs you need of the required quality and at the best possible price and (2) where you can best sell the product or service that you’ve put together from those inputs. Competitive gains can be obtained by engaging in global business transactions. The best way of doing business abroad may not be the same as the best way at home because (1) when a company operates internationally, it will engage in modes of business such as exporting and importing that differ from those in which it engages domestically and (2) physical, social, and competitive conditions differ among countries and affect the optimum ways to conduct business. Thus companies operating internationally have more diverse and complex operating environments than those that conduct business only at home. It is important to understand some international business complexities since company international operations, and government regulations of those operations affect overall national conditions—profits, employment security and wages, consumer prices, and national security. 1-6 Copyright © 2011 Pearson Education

International Business: Operations and Influences Copyright © 2011 Pearson Education

Measuring Globalization A.T. Kearney/Foreign Policy Globalization Index Economic Technological Personal Contact Political Such indexes indicate that globalization has been increasing since the mid-twentieth century as more trade barriers have been lifted and output from foreign-owned investments has increased. Today it is estimated that up to 25% of world production is sold outside of its country of origin. Some areas are still less globalized than others (i.e. Rural Africa, Asia, and Latin America). The A.T. Kearney/Foreign Policy Globalization Index is the most comprehensive, ranking 72 countries across four dimensions: Economic- regarding international trade and investment Technological- measure of Internet connectivity Personal Contact- measure of international travel and tourism, international telephone traffic, and personal transfers of funds internationally Political- measure of a country’s participation in international organizations and government monetary transfers In recent years, the index has ranked Singapore and Hong Kong as the most globalized countries and India and Iran as the least globalized. The ranking of the United States shows how globalization can differ by dimension: The United States ranks first on the technological scale but only 71st on the economic. Copyright © 2011 Pearson Education

Factors Contributing to Rapid Growth of International Business Increase in and expansion of technology Liberalization of cross-border trade and resource movements Development of services that support international business Growing consumer pressures Increased global competition Changing political situations Expanded cross-national cooperation 1. Population and economic growth allows for a larger portion of development to take place while advances in technology allow for increases in productivity using the same amount of inputs. Reducing costs and speeding up transactions, advances in communication and transportation allow more companies to expand their market base as well as obtain global resources and oversee foreign operations. 2. Most governments have reduced restrictions of cross-border trade for three reasons: -Their citizens want a greater variety of goods and services at lower prices. -Competition spurs domestic producers to become more efficient. -They hope to induce other countries to lower their barriers in turn. 3. As international business transactions have increased, so have services that help those transactions take place more quickly and easily. 4. Consumers today are more informed about foreign products and services and are better able to afford more luxury items. More consumers are able to comparison shop to find better deals worldwide. Companies look for growing markets where consumer pressures are highest such as China. 5. Companies continually look abroad to increase market share and reduce costs in order to better compete with other firms. Expansion abroad can take many forms: so-called born-global companies start out with a global focus because of their founders’ international experience and because advances in communications give them a good idea of where global markets and supplies are. Related to this, many new companies locate in areas where there are many competitors and suppliers—a situation known as clustering—which helps them to become quickly aware of foreign opportunities and to gain easier access to the resources needed to move internationally. 6. Countries of different political systems are more open than before to conducting international trade with each other. Governments are spending more resources on the improvement of infrastructure which increases the ease of transporting goods and resources. 7. Governments engage in international cooperation in order to satisfy three main needs: 1. Reciprocal advantages 2. To attack problems jointly that one country acting alone cannot solve 3. To deal with areas of concern that lie outside the territory of any nation Governments participate in treaties and trade agreements with other countries on behalf of their companies to ensure reciprocal advantages such as the use of certain ports and air-space as well as protection of intellectual property and lowering of trade restrictions to make it easier for their companies to operate internationally. Agreements may be bilateral or multilateral. Countries will share in activities along mutual borders that will benefit all parties. They also cooperate to solve problems they either cannot or will not solve on their own. One of the main reasons for this is because the amount of resources needed to solve the problem may be too great for one country to manage. Furthermore, the project or problem may affect more than one country and would require negotiation and possibly contribution of resources from all parties. Examples: Global warming, over-fishing, spread of disease (H1N1 virus, Avian Flue, Malaria…etc.), natural disasters. Copyright © 2011 Pearson Education

What’s Wrong with Globalization Threats to national sovereignty Economic growth and environmental stress Growing income inequality and personal stress Offshoring – the transferring of production abroad – is controversial in terms of who benefits when costs are reduced and whether the process exchanges good jobs for bad ones. Threats to National Sovereignty Some observers worry that the proliferation of international agreements, particularly those that undermine local restrictions on how goods are bought and sold, will diminish a nation’s sovereignty—that is, a nation’s freedom to “act locally” and without externally imposed restrictions. In addition, critics say that small economies depend so much on larger economies for supplies and sales that they are vulnerable to foreign demands. Finally, critics charge that globalization homogenizes products, companies, work methods, social structures, and even language, thus undermining the cultural foundation of sovereignty. Economic Growth and Environmental Stress: According to one argument, as globalization brings growth, it consumes more nonrenewable natural resources and increases environmental damage—despoliation through toxic and pesticide runoffs into rivers and oceans, air pollution from factory and vehicle emissions, and deforestation that can affect weather and climate. Others argue that global cooperation fosters superior and uniform standards for combating environmental problems. Further, global competition encourages companies to seek resource-saving and environmentally friendly technologies, such as automobile engines that use less gas and emit fewer pollutants. However, unless the positive results of globalization outpace the negative consequences of growth, sustaining economic growth will remain a problem in the future. Growing Income Inequality: By various measurements, income inequality has been growing in a number of countries. Critics claim that globalization has affected this disparity by helping to develop a global superstar system, creating access to a greater supply of low-skilled and low-cost labor and speeding competition that leads to winners and losers. There is also some evidence that the growth in globalization goes hand in hand not only with increased insecurity about job and social status but also with costly social unrest. Copyright © 2011 Pearson Education

Companies Engage in International Business To Expand Sales: pursuing international sales increases the potential market and potential profits To Acquire Resources: may give companies lower costs, new and better products, additional operating knowledge To Diversify or Reduce Risks: international operations may reduce operating risk by smoothing sales and profits, preventing competitors from gaining advantage 1 Copyright © 2011 Pearson Education

Modes of Operation in International Business Merchandise exports and imports Service exports and imports Tourism and Transportation Service Performance Asset Use Investments Foreign Direct Investment (FDI) Portfolio Investment Merchandise exports and imports are usually a country’s most common international economic transactions. Service exports and imports are international nonproduct sales and purchases. • Examples of services are travel, transportation, banking, insurance, and the use of assets such as trademarks, patents, and copyrights. • Service exports and imports are very important for some countries. • They include many specialized international business operating modes. Service Performance Example: Turnkey Projects and Management Contracts Asset Use Example: One company allows another to use its trademarks, patents, logo…etc. This occurs through licensing agreements and franchising. Investments: another form of asset use. There are two types; direct investment (FDI and Joint Venture) and noncontrolling financial interest (portfolio investment). Direct investment is characterized by the investor having a controlling interest in a foreign firm. Portfolio investment or noncontrolling financial interest includes owning shares of company stock or providing loans to a company. Copyright © 2011 Pearson Education

Multinational Enterprises Multinational Enterprises (MNEs) take a global approach to markets and production. Sometimes they are referred to as multinational corporations or companies (MNCs) or transnational companies (TNCs). Copyright © 2011 Pearson Education

Difference Between International and Domestic Operations When operating abroad companies may have to adjust their usual methods of carrying out business. Foreign conditions often dictate a more suitable method, and the operating modes used for international business differ from those used on a domestic level. Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Physical and Social Factors Affecting International Business Operations To operate within a company’s external environment, its managers must have knowledge of business operations and a working knowledge of social sciences, and how they affect all functional business fields. Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Physical and Social Factors Affecting International Business Operations Geographical Influences: Managers who are knowledgeable about geography are in a position to determine the location, quantity, quality, and availability of the world’s resources, as well as the best way to exploit them. The uneven distribution of resources throughout the world accounts in large part for the fact that different products and services are produced in different parts of the world. Geographic barriers—mountains, deserts, jungles, and so forth—often affect communications and distribution channels in many countries. And the chance of natural disasters and adverse climatic conditions (hurricanes, floods, earthquakes, tsunamis) can make investments riskier in some areas than in others, while affecting global supplies and prices. Political Policies: A large part of international business depends on government policies and receptiveness to foreign investment. Legal Practices: Companies must adhere to both domestic and international laws. Host country laws and the ways in which those laws are enforced affect the way companies conduct business in those countries. Behavioral Factors: The interpersonal norms of a country may necessitate a company’s alteration of operations. Economic Forces: Economics explains country differences in costs, currency values, and market size. 1-15 Copyright © 2011 Pearson Education

Competitive Factors Affecting International Business A company’s competitive strategy influences how and where it can best operate. A company’s competitive situation may differ in terms of its relative strength and which competitors it faces. Companies must also analyze the competitive environment in order to come up with an appropriate strategy for marketing its products or services in different countries. Most companies compete based on cost efficiency or product differentiation. Some strategies work best in certain countries where others would not. Example: Fiat uses a cost strategy in most situations but operates using a focus strategy in the U.S. where the market is not conducive to a mass-market Fiat brand strategy. Fiat sells over a quarter of all its Ferraris in the United States. Operating tactics will also depend on the size of the company, the amount of company resources available, the size of the market and the company’s share in that market. Likewise, the amount of resources a company must use and the type of competitive strategy employed will also depend on how well established the competition is in the market and whether they are also international or local. Copyright © 2011 Pearson Education

Competitive Factors Affecting International Business Copyright © 2011 Pearson Education

Future of International Business and Globalization Further globalization is inevitable. International business will grow primarily along regional rather than global lines. Forces working against further globalization and international business will slow down both trends. The view that globalization is inevitable reflects the premise that advances in transportation and communications are so pervasive that consumers everywhere will demand the best products for the best prices regardless of their origins. Those who hold this view also argue that because MNEs have so many international production and distribution networks in place, they’ll pressure their governments to place fewer rather than more restrictions on the international movement of goods and the means of producing them. The largest challenge to overcome will be figuring out how to spread the benefits of globalization equitably while minimizing the hardships placed on individuals and companies affected by increased international competition. The view that growth will be largely regional rather than global is based on studies that indicate that companies tend to conduct international business in neighboring countries. It is logical that when companies first engage in international business, that they would expand into neighboring countries first and continue outwardly from there. This helps reduce transportation costs and companies can benefit from regional trade agreements that reduce barriers. Antiglobalization sentiments have surfaced over the years, protesting against some of the negative effects of international business activity. The view of many anitglobalists is that multinational corporations are benefiting at the expense of the local citizenry by competing with domestic firms, using up valuable natural resources, taking advantage of nonexistent labor laws thus perpetuating human rights violations…etc. Antiglobalist pressures coupled with economic recession, terrorism/political instability and rising fuel costs among other things, threaten to slow international business growth. Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2011 Pearson Education