International Business International Business: An Overview 1-1

Malaysia Annual Trade 1995-2006                                                                                                    

What is International Business All commercial transactions between two or more countries Private Public - Over USD16.2 Trillion worth of goods and services cross border each year International business adds significant influences to typical domestic operations Physical Societal Competitive 1-3

International Business

Why Engage in International Business Expand sales (market motives) Volkswagen (Germany) Ericsson (Sweden) IBM (United States) Acquire resources (economic motives) Better components, services, products Foreign capital Technologies information Minimize risk (strategic motives) Take advantage of the business cycle for products/services Diversify among international markets 1-5

Reasons for Growth in International Business Rapid increase in and expansion of technology Transportation is quicker while costs are lower Communication enables control from afar Liberal government policies on trade and resources/ liberalization of cross-border movement Development of institutions that support international trade Consumer pressures Increased global competition 1-6

Examples of Reduction in Trade Barriers General Agreement on Tariffs and Trade www.gatt.org World Trade Organization (WTO) www.wto.org North America Free Trade Agreement www.nafta.org European Union (EU) europa.eu.int Asia Pacific Economic Cooperation www.apec.org

Average Tariff Rates on Manufactured Products 1913 1950 1990 2002 France 21 % 18 % 5.9 % 4.0 % Germany 20 % 26 % Italy 25 % Japan 30 % -- 5.3 % 3.8 % Holland 5 % 1 % Sweden 9 % 4.4 % Great Britain % United States 44 % 14 % 4.8 % Under the umbrella of GATT, eight rounds of negotiations among member states (now numbering 148) have worked to lower barriers to the free flow of goods and services. The most recent round of negotiations, known as the Uruguay Round, was completed in December 1993. The Uruguay Round further reduced trade barriers; extended GATT to cover services as well as manufactured goods; provided enhanced protection for patents, trademarks, and copyrights; and established the World Trade Organization (WTO) to police the international trading system. Table 1.1 summarizes the impact of GATT agreements on average tariff rates for manufactured goods. As can be seen, average tariff rates have fallen significantly since 1950 and now stand at about 4.0 percent.

Examples of Technological Innovation Internet, Intranet, and Extranet Use of World Wide Web, Private Networks on Internal company Web sites Activities Occurring After The Production Process To bypass intermediaries like wholesalers and retailers, companies can enter global markets, cut postproduction costs, and pass savings on to customers. Advancement in Technology Advances in transportation methods are helping to globalize both markets and production activities. Advancements in the shipping industry are facilitating globalization by making shipping more efficient and dependable.

Internet Usage Growth The rapid growth of the Internet and the associated World Wide Web (which utilizes the Internet to communicate between World Wide Web sites) is the latest expression of communication technology development. In 1990, fewer than 1 million users were connected to the Internet. By 1995 the figure had risen to 50 million. In 2004 it grew to about 945 million. By 2007, forecasts suggest the Internet may have more than 1.47 billion users, or about 25 percent of the world’s population. In July 1993, some 1.8 million host computers were connected to the Internet (host computers host the Web pages of local users). By January 2005, the number of host computers had increased to 317 million, and the number is still growing rapidly. In the United States, where Internet usage is most advanced, almost 60 percent of the population was using the Internet by 2003 (see figure 1.3). Worldwide the figure was 15 percent and growing fast. The Internet and World Wide Web (WWW) promise to develop into the information backbone of the global economy.

What is Globalization? Trend toward greater economic, cultural, political and technological interdependence among national institutions and economies Two components: The globalization of markets The globalization of production This slide offers a definition for globalization; it highlights that globalization affects two primary areas.

Globalization of Markets The merging of distinctly separate national markets into a global marketplace Falling barriers to cross-border trade have made it easier to sell internationally Tastes and preferences converge onto a global norm Firms offer standardized products worldwide creating a world market This slide offers a definition of the globalization of markets trend. It also details why this has happened.

Globalization of Markets Difficulties that arise from the globalization of markets Significant differences still exist among national markets Country-specific marketing strategies Varied product mix Some problems occur when companies begin operating globally. These include: very significant differences still exist among national markets along many relevant dimensions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, business systems, and legal regulations. These differences frequently require that marketing strategies, product features, and operating practices be customized to best match conditions in a country. For example, automobile companies will promote different car models depending on a range of factors such as local fuel costs, income levels, traffic congestion, and cultural values. Similarly, many companies need to vary aspects of their product mix and operations from country to country depending on local tastes and preferences.

Globalization of Markets The most global markets are not consumer markets The most global markets are for industrial goods and materials that serve a universal need the world over The most global markets currently are not markets for consumer products—where national differences in tastes and preferences are still often important enough to act as a brake on globalization—but markets for industrial goods and materials that serve a universal need the world over. These include the markets for commodities such as aluminum, oil, and wheat; the markets for industrial products such as microprocessors, DRAMs (computer memory chips), and commercial jet aircraft; the markets for computer software; and the markets for financial assets from U.S. Treasury bills to eurobonds and futures on the Nikkei index or the Mexican peso.

Globalization of Production Refers to sourcing of goods and services from locations around the world to take advantage of Differences in cost or quality of the factors of production Labor Land Capital The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital). By doing this, companies hope to lower their overall cost structure and/or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively.

Globalization of Production Historically this has been primarily confined to manufacturing enterprises Increasingly companies are taking advantage of modern communications technology, and particularly the Internet, to outsource service activities to low-cost producers in other nations As we saw in the Opening Case, the Internet has allowed hospitals to outsource some radiology work to India, where images from MRI scans and the like are read at night while U.S. physicians sleep, and are the results are ready for them in the morning. Similarly, in December 2003, IBM announced it would move the work of some 4,300 software engineers from the United States to India and China (software production is counted as a service activity).

Globalization of Production Outsourcing of productive activities to different suppliers results in the creation of products that are global in nature Impediments to the globalization of production include Formal and informal barriers to trade Barriers to foreign direct investment Transportation costs Issues associated with economic risk Issues associated with political risk Robert Reich, who served as secretary of labor in the Clinton administration, has argued that as a consequence of the trend exemplified by companies such as Boeing, Microsoft, and IBM, in many cases it is becoming irrelevant to talk about American products, Japanese products, German products, or Korean products. But as with the globalization of markets, one must be careful not to push the globalization of production too far. As we will see in later chapters, substantial impediments still make it difficult for firms to achieve the optimal dispersion of their productive activities to locations around the globe

Benefits of Globalization of markets Globalization of production Reduces marketing costs New market opportunities Levels income stream Access low-cost labor Acquire technical expertise Obtain production inputs

Measuring Globalization Political engagement - membership and involvement in international organizations Technological connectivity – Internet users, hosts and secured servers Personal contact – International connections Economic integration – trade, FDI, portfolio capital flows, and investment income

Top 20 Global Nations Political Technological Personal Economic

The Globalization Debate Pro Factors Lower prices for goods and services Economic growth stimulation Increase in consumer income Creates jobs Countries specialize in production of goods and services that are produced most efficiently Con Factors Destroys manufacturing jobs in wealthy, advanced countries Wage rates of unskilled workers in advanced countries declines Companies move to countries with fewer labor and environment regulations Loss of sovereignty The past quarter century has seen rapid changes in the global economy. Barriers to the free flow of goods, services, and capital have been coming down. The volume of cross-border trade and investment has been growing more rapidly than global output, indicating that national economies are becoming more closely integrated into a single, interdependent, global economic system. As their economies advance, more nations are joining the ranks of the developed world. But it is always hazardous to use established trends to predict the future. The world may be moving toward a more global economic system, but globalization is not inevitable. Countries may pull back from the recent commitment to liberal economic ideology if their experiences do not match their expectations. Also, greater globalization brings with it risks of its own. This was starkly demonstrated in 1997 and 1998 when a financial crisis in Thailand spread first to other East Asian nations and then in 1998 to Russia and Brazil. Ultimately the crisis threatened to plunge the economies of the developed world, including the United States, into a recession. This slide outlines some of the arguments from the great globalization debate.

International Business Players Business that has direct investments abroad in multiple countries Small companies and individuals becoming increasingly active in international trade and investment Takes a global perspective on its market and engages in international business from or near its inception Multinational Corporation Small Businesses and Entrepreneurs Born-Global Firm

Levels/Terms of International Companies Multinational Enterprise (MNE): global approach to markets and production Multinational Corporation (MNC) Transnational Company (TNC) Globally integrated company: integrated operations located in different countries Multidomestic company: multinational companies that allow local responsiveness 1-8

National Operations for International Companies Multidomestic strategy: countries operate autonomously Global strategy: integrate various country operations into an international headquarters control 1-9

The National Composition of the Largest Multinationals

How They Stack Up Comparing revenue of the world's 10 most global firms to the gross domestic product of nations

Modes of International Business Importing and exporting Tourism and transportation Licensing and franchising Turnkey operations Management contracts Direct and portfolio investment 1-7

Patterns of Internationalization Figure 1.7 1-16

Management in International Business In additional to domestic business management skills, international business management requires Social science understanding Political science appreciation Legal awareness And an innate ability in: Anthropology – study of mankind (origins/belief/customs) Sociology – development and behaviour of society Psychology – study of mind Economics Geography 1-4

Managing in the Global Marketplace Managing an international business is different from managing a purely domestic business in four areas: Countries are different Range of problems confronted by a manager in an international business is wider and the problems themselves are more complex than those confronted by a manager in a domestic business An international business must find ways to work within the limits imposed by government intervention in the international trade and investment system International transactions involve converting money into different currencies

Develop World-Class Products Emphasize Global Awareness Global Manager Know How to Analyze Problems Improve Logistics Market Effectively Develop World-Class Products Emphasize Global Awareness Know the Customer The Keys to Success