Section One The Nature of International Business by Ball, McCulloch, Frantz, Geringer, and Minor

1 The Rapid Change of International Business International Business McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved. This chapter covers: Internationalization of markets Various names given to firms in multiple countries Effect of the internet on international business Drivers leading firms to globalization of product Differences between domestic and international businesses Three environments of international business International Business by Ball, McCulloch, Frantz, Geringer, and Minor

Chapter Objectives Chapter Objectives 2  Appreciate the dramatic internationalization of markets.  Understand the various names given to firms that have substantial operations in more than one country.  Appreciate the profound effect of the Internet on many international business firms.  Understand the five kinds of drivers that are leading international firms to the globalization of their operations.  Comprehend why international business differs from domestic business.  Describe the three environments--domestic, foreign, and international--in which an international company operates 1-2

International Business Experience International Business Experience 3 Seventy-nine percent of CEOs believe all business majors should have an introductory international business course Seventy percent will consider expertise in foreign language and international exposure in hiring decisions The majority of CEOs consider courses related to international business relevant to their company Managers wanting to advance will need to have foreign experience 1-3

International Business Terminology International Business Terminology 5  The United Nations  uses transnational instead of multinational to describe a firm doing business in more than one country.  Business people  define a transnational as a company formed by a merger of two firms of approximately the same size that are from two different countries  Unilever (Dutch-English)  Dunlop-Pirelli (English-Italian) 1-4

Definitions Definitions 8  International Business is a business whose activities are carried out across national borders. includes international trade and foreign manufacturing also includes a growing service industry in areas such as transportation, tourism, advertising, construction, retailing, wholesaling, and mass communication. 1-5

Definitions Definitions 8  Foreign Business  domestic operations within a foreign country  A Multidomestic Company  has multicountry affiliates, each of which formulates its own business strategy based on perceived market differences.  A Global Company  attempts to standardize and integrate operations worldwide in all functional areas.  International Company  describes both global and multidomestic companies 1-6

Global Company- By Whose Definition? Have a worldwide presence in its market Allen-Edmonds produces all shoes in Port Washington, Wisconsin – ships to over 33 nations Standardize operations worldwide in one or more functional areas P&G has operations in more than 70 countries and sells essentially the same products in over 140 countries Integrate operations worldwide Multicultural multinationals respond to local markets, produce products worldwide, exploit knowledge and technology on a global basis 1-7

History of International Business Phoenician and Greek merchants sent abroad before time of Christ 1600’s British East India Company established branches in Asia 1700’s American colonial traders begin operations FDI prior to Civil War by Colt Fire Arms and Ford 1800’s Singer Sewing Machine first foreign production 1914 at least 37 American companies producing overseas 1-8

Globalization  Economic Globalization  is the international integration of goods, technology, labor, and capital.  refers to the implementation of global strategies which link and coordinate a firm’s international activities on a worldwide basis.  definition continues to broaden to include  political, social, environmental, historical, geographical, and cultural implications 1-9

Globalization Forces 11  There are five major kinds of drivers that are leading international firms to the globalization of their operations. Political Technological Market Cost Competitive 1-10

Globalization Forces 11 Political There is a trend toward the unification and socialization of the global community. Preferential trading agreements NAFTA European Union 1-11

Globalization Forces 11 Technological Advancements in computers and communication technology are permitting an increased flow of ideas and information across borders. The Internet and network computing enables small companies to compete globally. Business to business commerce is experiencing significant savings by using the Internet for business exchanges. Web is used to find suppliers Web is used to process purchase orders 1-12

Globalization Forces 12 Market As companies globalize, they also become global customers. Companies follow customers abroad Saturation of the home market Customer tastes and lifestyles are converging 1-13

Globalization Forces Cost Economies of scale to reduce unit cost are always a management goal. Globalizing product lines can reduce development, production, and inventory costs can help achieve economies of scale. Companies can also locate production in countries where production costs are lower. 1-14

Globalization Forces Competitive Competition continues to increase in intensity. Newly industrialized and developing countries Companies are defending their home markets from competitors by entering the competitors’ home markets to distract them. 1-15

Explosive Growth 13  Foreign Direct Investment  One commonly used measure of growth  Refers to direct investment into equipment, structures, and organizations in a foreign country sufficient to obtain management control  World stock of FDI rose from $519 billion in 1980 to $6.6 trillion in

Explosive Growth Exporting Refers to the transportation of any domestic good or service to a destination outside the home country or region The level of world merchandise exports more than tripled from 1980 to The level of service exports worldwide more than quadrupled in the same period. 1-17

Number of International Companies In 2002, the United Nations estimated there were over 63,800 companies with a total of over 866,000 foreign affiliates accounting for two-thirds of world trade. Foreign affiliates’ sales were $17.7 trillion in Growth due in part to liberalization of government policies toward foreign investment 1-18

2002 Top International Firms Ranking Nation or Firm 1. United States 2. Japan 3. Germany 4. United Kingdom 5. France 6. China 7. Italy 8. Canada 9. Mexico 10. Spain 1-19 Total Sales for 2002 ($billion) $10, , , , , , ,

The Globalization Debate Supporting Free trade advances economic development Reduces poverty, improves education, health and life expectancy Expanded trade creates more and better jobs Must manage the costs and transition of workers 1-20 Globalization Concerns produces uneven results across nations and people Increases gap between rich and poor has negative effects on labor and labor standards Jobs migrate to developing nations contributes to decline in environment and health conditions

Forces in the Environment 18  Environment The sum of all forces surrounding and influencing the life and development of the firm. Forces can be classified as External forces Management can exert influence but cannot control Internal forces Management must administer and adapt 1-21

External Environmental Forces 18 Competitive Kind, number, location Distributive For goods and services Economic GNP, labor cost Socioeconomic Characteristics of population Financial Interest rates, inflation, taxes 1-22 Legal Laws governing business Physical Topography, climate Political Form of government Sociocultural Attitudes, beliefs Labor Skills, attitudes Technological Equipment, skills

Internal Environmental Forces  Factors of production  Capital, raw material, and people  Activities of the organization  Personnel, finance, production, and marketing 1-23

Domestic Environment 19 Composed of all the uncontrollable forces originating in the home country that surrounds and influences the life and development of the firm Managers most familiar May affect foreign operations 1-24

Foreign Environment 19  Operates differently than the domestic environment for the following reasons Different force values Changes difficult to assess Particularly political and legal forces Forces interrelated 1-25

International Environment 21  The International Environment is the interaction between the domestic environmental forces and the foreign environmental forces. the interaction between the foreign environmental forces of two countries when an affiliate in one country does business with customers in another. Decision making is more complex 1-26

International Business Model  International business transactions take place across national borders and may involve three environments. Domestic Foreign International Figure 1.2 here 1-27

United States Commercial Service The U.S. Commercial Service offers four ways to grow your international sales: world-class market researchmarket research trade events that promote your product or service to qualified buyers trade events introductions to qualified buyers and distributors introductions counseling through every step of the export process counseling

The Language of Trade (Examples) AD VALOREM EQUIVALENT — The duty collected under a specific tariff or a compound tariff expressed as a percentage of the value of the imported item. Since a specific tariff is calculated on the basis of units (of volume or weight), rather than value, and since prices can change over time, the ad valorem equivalent could differ when calculated for different time periods. ubs AGREEMENT ON RULES OF ORIGIN — A WTO agreement addressing the rules that determine the country of origin of an imported product. Rules of origin play an important role in international trade due to the fact that the application of duties and other restrictions on entry often depends on the deemed source of the imports. The agreement provides for harmonization in the practices of WTO members in determining the country of origin of products.

Top Five Global Companies* Europe BP Royal Dutch/Shell Group Daimler Chrysler Total Allianz *According to Fortune 500 Asia Toyota Motor Nippon Telegraph and Telephone Hitachi Honda Motor Sony

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