International Business Environment INTERNATIONALMANAGEMENT Chapter 2

International Business Environment – The Trend Intense competition among industries, firms and countries on a global level is a recent development. Intense competition among industries, firms and countries on a global level is a recent development. The present trends are towards the increasing globalization and interdependence of firms, markets and countries. The present trends are towards the increasing globalization and interdependence of firms, markets and countries. In a bid to meet commitments to institutions like WTO, IMF and WB, country after country is pulling down barriers to foreign trade and investment. In a bid to meet commitments to institutions like WTO, IMF and WB, country after country is pulling down barriers to foreign trade and investment.

There is a growth of organization and administrative structures to manage resources and risks across national boundaries. There is a growth of organization and administrative structures to manage resources and risks across national boundaries. Quantitative restrictions on foreign trade are being dismantled speedily and tariff barriers are on the decline. Quantitative restrictions on foreign trade are being dismantled speedily and tariff barriers are on the decline. New opportunities to foreign investors and entrepreneurs are being provided to operate in the countries. New opportunities to foreign investors and entrepreneurs are being provided to operate in the countries. The MNCs are expanding their operations by aggressively adopting marketing strategies to local conditions. The MNCs are expanding their operations by aggressively adopting marketing strategies to local conditions.

In the coming years there may be extinction of many business and considerable realignments in many others by M & A, etc. In the coming years there may be extinction of many business and considerable realignments in many others by M & A, etc. In future MNCs will gear up their activities due to the presence of huge potential market. In future MNCs will gear up their activities due to the presence of huge potential market. Many firms having indigenous technology in less developed economies will fail to compete with the MNCs. Many firms having indigenous technology in less developed economies will fail to compete with the MNCs. Number of small units may close up their activities or may merged with the big companies. Number of small units may close up their activities or may merged with the big companies.

Internationalization-Why? Process by which firms increase their awareness of the influence of international activities on their future, and establish and conduct transactions with firms from other countries. Process by which firms increase their awareness of the influence of international activities on their future, and establish and conduct transactions with firms from other countries. Reasons to become international: Desire for continued growth Unsolicited foreign order Domestic market saturation Potential to exploit new technological advantage Clear evidence - Strong correction exists between improved performance and degree of internationalization

Internationalization Pull factorsPush Factors Pull factorsPush Factors (Proactive reasons) (Reactive reasons) Pull factors are forces of attraction which pull the business to the foreign markets. Pull factors are forces of attraction which pull the business to the foreign markets. Push factors are forces of compulsion which prompt companies to internationalize. Push factors are forces of compulsion which prompt companies to internationalize.

Pull FactorsPush Factors Relative ProfitabilityDomestic market constraints Growth Prospects Competition

Profit Advantage: Even when international business is less profitable than the domestic, it would increase the total profit. Even when international business is less profitable than the domestic, it would increase the total profit. The AC per unit will be lowest if the plants is operated at optimum capacity OQ 1 Domestic demand constraint makes it to produce OQ and hence AC is OC or QR much higher than OC 1 or Q 1 I. AC to the extent of CC 1 can be reduced by exporting QQ 1 amount and the profitability will increase per unit by CC 1 per unit.

0 Q Q 1 R I AC CC1CC1

Growth Opportunities: MNCS are getting increasingly interested in a number of developing countries due to the rapid rise of income and population in these countries. MNCS are getting increasingly interested in a number of developing countries due to the rapid rise of income and population in these countries. 1 billion people estimated to be added to the world population between 1999 and billion people estimated to be added to the world population between 1999 and For going international is to take advantage of the opportunities in other countries For going international is to take advantage of the opportunities in other countries

Domestic Market Constraints: Domestic demand constraints drive many companies to expand the market beyond the national border. Domestic demand constraints drive many companies to expand the market beyond the national border. TS DS FS Sale

For Example: Nestle derives only about 2% of its total sales from its to home market, Switzerland. Nestle derives only about 2% of its total sales from its to home market, Switzerland. For Philips, only 8 % of the total sales coming from the home market, Holland, but many different subsidiaries of Philips have contributed much larger share of the total revenues than the parent company. For Philips, only 8 % of the total sales coming from the home market, Holland, but many different subsidiaries of Philips have contributed much larger share of the total revenues than the parent company.

Competition Protected market does not normally motivate Protected market does not normally motivate Companies to seek business outside the home market. Companies to seek business outside the home market. Economic liberalization brings competition from foreign firms as well as from those within the country. Economic liberalization brings competition from foreign firms as well as from those within the country. Companies take an offensive international competitive strategy by way of counter competition. Companies take an offensive international competitive strategy by way of counter competition. To penetrate the home market of the potential foreign competitor so as to diminish its competitive strength & to protect domestic market share.

Dimensions of Internationalization Inward-looking Outward-looking (Impact of global(Nature of competitors on competition in foreign domesticallymarket) oriented firms)

Inward-looking ( Impact of global competitors on domestically oriented firms) 1. Importing/sourcing 2. Acting as Licensee from a foreign company 3. Establishing JV inside the home country with foreign companies 4. Managing as a wholly owned subsidiary of a foreign firm.

Outward-Looking (Nature of competition in foreign market 1. Exporting 2. Acting as Licensor to a foreign company 3. Establishing JV outside the home country with foreign companies 4. Establishing wholly owned business outside the home country.

Managerial Issues on Production and Sourcing From where should the firm supply the target market? From where should the firm supply the target market? To what extent should the firm itself undertake production? To what extent should the firm itself undertake production? To the extent that it does not, what and where should it buy from others? To the extent that it does not, what and where should it buy from others? To the extent that a firm opts to do at least some manufacturing, how should it acquire facilities. To the extent that a firm opts to do at least some manufacturing, how should it acquire facilities. Should the firm produce in one plant or many, related or autonomous? Should the firm produce in one plant or many, related or autonomous? What sort of technology should it use? What sort of technology should it use? What site is best? What site is best? Where should research and development be located? Where should research and development be located?

Licensing-Issues Types of firms that license-out Types of firms that license-out Predominant industries involved Predominant industries involved Revenues generated Revenues generated Countries they license to Countries they license to Costs of negotiating & administering license agreements Costs of negotiating & administering license agreements Common terms in their license agreements Common terms in their license agreements Areas in which there is most disagreement Areas in which there is most disagreement

For Licensor Licensing is a chance to exploit its technology in markets that are too small to justify larger investments or in market that restrict imports or FDI. Licensing is a chance to exploit its technology in markets that are too small to justify larger investments or in market that restrict imports or FDI. Means of testing and developing a market. Means of testing and developing a market. For Licensee Permits the acquisition of technology more cheaply than by internal development. Permits the acquisition of technology more cheaply than by internal development. Allows a firm to acquire a technology that, when combined with other skills already present, permits it to diversify. Allows a firm to acquire a technology that, when combined with other skills already present, permits it to diversify.

Managerial Issues For Licensor – Risks of losing a technological advantage, reputation and potential profits. For Licensor – Risks of losing a technological advantage, reputation and potential profits. For the Licensee – Risks that the technology will not work as expected or will cost more to implement than anticipated. For the Licensee – Risks that the technology will not work as expected or will cost more to implement than anticipated.

Management of International JVs Why the particular market is being chosen? Why the particular market is being chosen? Why the investment is occurring? Why the investment is occurring? Whether now is the appropriate time? Whether now is the appropriate time?

Management of International JVs To combine complementary skills from different organizations. To combine complementary skills from different organizations. To assure or speed market access. To assure or speed market access. To meet a technological gap. To meet a technological gap. To strategically respond to more intense competition. To strategically respond to more intense competition. NEED

Managerial Issues Whether it is equity-based? Whether it is equity-based? Length of the agreement. Length of the agreement. Whether a whole range of resources and right transferred? Whether a whole range of resources and right transferred? Method of resource transfer. Method of resource transfer. Typical compensation method. Typical compensation method.

Global Manager-Challenges… Ability to develop and use global strategic skills. Ability to develop and use global strategic skills. Manage change and transition. Manage change and transition. Manage cultural diversity. Manage cultural diversity. Design and function in flexible organization structures. Design and function in flexible organization structures. Work with others and in teams. Work with others and in teams. Communicate, learn and transfer knowledge in an or organization. Communicate, learn and transfer knowledge in an or organization.

Effects of Globalization on the World Economy The Global economy is becoming come integrated day by day. The Global economy is becoming come integrated day by day. Volume of World trade (4.0 %) has grown at a faster rate than volume of World output (1.5 %). Volume of World trade (4.0 %) has grown at a faster rate than volume of World output (1.5 %). Trend of lowering the barriers to the free flow of goods, services and capital among countries. Trend of lowering the barriers to the free flow of goods, services and capital among countries. FDI has been playing a crucial role in the global economy. FDI has been playing a crucial role in the global economy.

Imports are penetrating deeper into the world’s largest economies as well. Imports are penetrating deeper into the world’s largest economies as well. Growth of world trade, FDI and imports lead to more foreign competition in the domestic markets. Growth of world trade, FDI and imports lead to more foreign competition in the domestic markets. Domestic firms are required to enhance the production & distribution capabilities to compete with foreign players. Domestic firms are required to enhance the production & distribution capabilities to compete with foreign players. Companies have started looking the world as a market for their products. Companies have started looking the world as a market for their products. Innovations have started spreading faster. Innovations have started spreading faster.

Opportunities have been increasing for the firms. Opportunities have been increasing for the firms. Companies have started dispersing their manufacturing, marketing and research facilities around the globe where cost and skill conditions are most favorable. Companies have started dispersing their manufacturing, marketing and research facilities around the globe where cost and skill conditions are most favorable.