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International Business Session 1 What is International Business? Business transactions between parties from more than one country Sourcing, Manufacturing, Selling, Developing Parties may include ◦ Private individuals ◦ Individual companies ◦ Groups of companies ◦ Governmental agencies Why Study International Business? Today’s business environment is global. Conducting international business presents unique risks, challenges and opportunities. ASK YOURSELF: is your company maximizing the opportunities of global business across the value chain? Key Objectives Learn to: 1. Understand the global business environment and how it is different from the national environment. 2. Select between the different modes of international business 3. Analyze and react to different cultural contexts 4. Research and evaluate global markets. 5. Assess how countries can shape global business through policy and integration 6. Understand the EU’s role in the global marketplace International vs. Domestic OPPORTUNITIES 1.Seek opportunities for growth through market diversification 2.Gain new ideas about products, services, and business methods 3.Better serve key customers that have relocated abroad 4.Be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products International vs. Domestic OPPORTUNITIES 5. 6. 7. Gain access to lower-cost or better-value factors of production Develop economies of scale in sourcing, production, marketing, and R&D Confront international competitors more effectively or thwart the growth of competition International vs. Domestic RISKS 1. 2. 3. 4. Cross-cultural risk: a situation or event where a cultural miscommunication puts some human value at stake Country risk: potentially adverse effects on company operations and profitability holes by developments in the political, legal, and economic environment in a foreign country Currency risk: risk of adverse unexpected fluctuations in exchange rates Commercial risk: firms potential loss or failure from poorly developed or executed business strategies, tactics, or procedures Basic Indicators of International Business Balance of Payments ◦ http://www.cnb.cz/en/statistics/bop_s tat/bop_q/bop_usd_en.htm Indices ◦ Demographic ◦ Economic ◦ Business ◦ Social and Technological Balance of Payments (BOP) Accounting System Measures and records all economic transactions between residents of one country and residents of all other countries during specified time period Provides understanding of performance of each country’s economy in international markets Signals fundamental changes in country competitiveness Assists policy makers in designing appropriate public policies Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall 7-11 Major Components of the BOP Accounting System Current Account Capital Account Official Reserves Errors and Omissions Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall 7-12 Table 7.6. U.S. Balance of Payments in 2007 Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall 7-13 Population vs. GDP as percentage of world total World Population 2010 Demographics 16 China India Population Pyramids Purchasing Power Parity (PPP) World GDP 2008 Per Capita GDP Doing Business Produced by World Bank Evaluates business regulations and enforcement 180+ countries 10 categories of data www.doingbusiness.org National Business Environment 1. Starting a Business Tracks the procedures, time, and costs for a limited liability company to legally start operation. 2. Dealing with Licenses Tracks the procedures, time and costs to build a warehouse, including obtaining necessary licenses and permits, completing required notifications and inspections and obtaining utility connections. 3. Hiring & Firing Workers Measures the flexibility of regulations for hiring and firing workers and the costs of hiring and firing. National Business Environment 4. Registering Property Tracks the steps, time, and cost involved in registering property. 5. Getting Credit Explores the role of creditor rights and credit information registries in expanding access to credit. 6. Protecting Investors Measures the strength of minority shareholder protections against directors’ misuse of corporate assets for personal gain. 7. Paying Taxes Records the tax that a mediumsize company must pay or withhold in a given year, as well as measures of the administrative burden in paying taxes. National Business Environment 8. Trading Across Borders Details the costs and procedures involved in importing and exporting a standardized shipment of goods. 9. Enforcing Contracts Evaluates the efficiency of contract enforcement by following the evolution of a payment dispute and tracking the time, cost, and number of procedures involved from the moment the plaintiff files the lawsuit until actual payment. 10. Closing a Business Measures the time and cost of bankruptcy procedures, and develops indices of procedural bottlenecks in bankruptcy law Web Resources Country Financial and Demographic info ◦ http://www.worldbank.org ◦ https://www.cia.gov/library/publications/the-worldfactbook/index.html ◦ http://globaledge.msu.edu/ ◦ http://www.oecd.org Economic and Political Freedom ◦ http://www.freedomhouse.org/template.cfm?page=1 ◦ http://www.heritage.org/index/ National Business Environment ◦ http://www.doingbusiness.org Human Development ◦ http://www.undp.org Protectionism ◦ Mercantilism ◦ Jobs ◦ Defense ◦ Infant Industry Free Trade ◦ Comparative Advantage ◦ Competitive Advantage Why do nations trade? Perspectives of the Nation and the Firm Comparative advantage Is the concept that helps answer the question of all nations can gain and sustain national economic superiority Competitive advantage Is the concept that helps explain how individual firms can gain and sustain distinctive competence vis-à-vis competitors Examples of National Comparative Advantage China is a low labor cost production base India’s Bangalore region offers a critical mass of IT workers Ireland’s repositioning enabled a sophisticated service economy Dubai, a previously obscure Emirate, has been transformed into a knowledge-based economy National advantage can be Examples of Firm Competitive Advantage Dell’s prowess in global supply chain management Nokia’s design and technology leadership in telecommunications Samsung’s leadership in flatpanel TV Herman Miller’s design leadership in office furniture (e.g., Aeron chairs) Limitations of Early Trade Theories  Do not take into account the cost of international transportation  Tariffs and import restrictions can distort trade flows  Scale economies can bring about additional efficiencies  When governments selectively target certain industries for strategic investment, this may cause trade patterns contrary to theoretical explanations  Today, countries can access needed lowcost capital on global markets  Some services do not lend themselves to cross-border trade 1. 2. 3. 4. Michael Porter’s Diamond Model: Sources of National Competitive Advantage Firm strategy, structure, and rivalry – the presence of strong competitors at home serves as a national competitive advantage Factor conditions – labor, natural resources, capital, technology, entrepreneurship, and know how Demand conditions at home – the strengths and sophistication of customer demand Related and supporting industries – availability of clusters of suppliers and complementary firms with Porter’s Diamond of National Competitive Advantage Firm Strategy, Structure, and Rivalry Factor Conditions Demand Conditions Related and Supporting Industries National Industrial Policy Proactive economic development plan implemented by the public sector to nurture or support promising industry sectors with potential for regional or global dominance. Public sector initiatives can include: Tax incentives Monetary and fiscal policies Rigorous educational systems Investment in national infrastructure Strong legal and regulatory systems Globalization “the growing interdependence of countries world-wide through the increasing volume and variety of cross-border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology.” – IMF 37 Internationalization Growth of relations between nations and cultures or between institutions situated in different nations or cultures. 38 Globalization Internationalization  Growing  Relations world systems  Transnational, Subnational and Supranational actors  Driven by free markets and technology between nations  Nation state is central actor  Driven by national interests What’s the difference? 39 Comparing the Growth Rates of World GDP and World Exports Productivity levels “The World is Flat” Thomas Friedman Triple Convergence: 1. 10 Flattening Forces     Internet and IT integration Outsourcing, Offshoring, Insourcing, Supply Chain Uploading, Informing at individual level Technological speed and cost 2. Productivity Lag / Learning Curve 3. Opening of Countries (3 billion people)   USSR, Central Europe, China, India, South America Market economies and integrated financial system Top Global Brands (select industries) Beer Cars Mobile Operators 1 Toyota 1 Budweiser 1 China Mobile 2 BMW 2 Bud Light 2 Vodafone 3 Porsche 3 Heineken 3 Verizon Wireless 4 Mercedes 4 Corona 4 NTT DoCoMo 5 Honda 5 Stella Artois 5 Orange 6 Nissan 6 Guinness Ford Miller Light AT&T 7 7 6 Chevrolet Skol T-Mobile 8 8 7 VW Amstel Movistar 9 9 8 Lexus Beck’s MTS 10 1 0 9 10 TIM Major Companies in Non-Triad Markets  Mahindra  Orascom  Lenovo  Infosys  Wipro  SABMiller  Embraer  Ranbaxy  Haier  Tata & Mahindra Major Companies in Non-Triad Markets  Mahindra Mahindra  Orascom  Lenovo  Infosys  Wipro  SABMiller  Embraer  Ranbaxy  Haier  Tata & India Automotive Egypt Cellular China Computers India Software India Tech Services South Africa Brewing Brazil Aircraft India Pharmaceuticals China Appliances India Automotive Negative Consequences of Market Globalization       Loss of national sovereignty Offshoring and the flight of jobs Effect on the poor Effect on health and safety Effect on the natural environment Effect on national culture How Globalized is the World? Only semiglobalized? http://www.ft.com/intl/businessed ucation/iese