International Business MBA Exam Notes
Sixteenth Edition Global Edition John D. Daniels, Lee H. Radebaugh, Daniel P. Sullivan
1. International Business and Globalization
WHY STUDY ABOUT GLOBALIZATION, IB, AND THEIR RELATIONSHIP?
Globalization is the widening and deepening of interdependent relationships among people from different nations.
The term sometimes refers to the elimination of barriers to international movements of goods, services, capital, technology, and people that influence the integration of world economies.
Throughout history, expanded human connections have extended people’s access to more varied resources, products, services, and markets.
FACTORS IN INCREASED GLOBALIZATION
What factors have contributed to the growth of globalization in recent decades? Most analysts cite the following interrelated factors:
1. Rise in and application of technology
2. Liberalization of cross-border trade and resource movements
3. Development of services that support IB
4. Growth of consumer pressures
5. Increase in global competition
6. Changes in political situations and government policies
7. Expansion of cross-national cooperation
Rise in and Application of Technology
Why have technical developments increased so much?
More than half the scientists who have ever lived are alive today.
One reason, of course, is population growth.
But another is rising productivity— taking less time to produce the same thing—which frees up more people to develop new products because fewer people are necessary to produce them.
This rising productivity also means that on average people can buy more, including the new products, by working the same number of hours.
The entry of new products into the market creates a need for other complementary products (such as cases and apps for smartphones), thus accelerating the need for scientists and engineers.
Advances in Communications and Transportation
- Strides in communications and transportation now allow us to discover, desire, and demand goods and services from abroad.
Innovations in transportation mean that more countries can compete for sales to a given market. - U.S. purchases of foreign-grown flowers used to be largely impractical and aimed only at high-income consumers.
- Improved communications and transportation also enhance a manager’s ability to oversee foreign operations, such as more easily visiting foreign facilities and communicating with managers therein.
- Thanks to the Internet, companies can instantly exchange pictures of samples.
Even small companies can reach global customers and suppliers.
Liberalization of Cross-border Trade and resource Movements
To protect its own industries, every country restricts the entry and exit of not only goods and services but also the resources—workers, capital, tools, and so on—needed to produce them.
Such restrictions, of course, set limits on IB activities and, because regulations can change at any time, contribute to uncertainty. Over time, however, most governments have reduced such restrictions.
Services that Support IB
Companies and governments have developed services that facilitate global commerce.
For example, because of bank credit agreements—clearing arrangements that convert one currency into another and insurance that covers such risks as non-payment and damage enroute most producers can be paid relatively easily for their sales abroad.
Growth in Consumer Pressures
More consumers know more today about products and services available in other countries, can afford to buy them, and want the greater variety, better quality, and lower prices offered by access to them.
Consumer pressure has also spurred companies to spend more on research and development (R&D) and to search worldwide for innovations and products they can sell to ever more-demanding consumers.
By the same token, consumers are more proficient today at scouring the globe for better deals, such as searching the Internet for lower-priced prescription drugs abroad.
Increase in Global Competition
Increased competitive pressures can persuade companies to buy or sell abroad.
For example, a firm might introduce products into markets where competitors are already gaining sales, or seek supplies where competitors are getting cheaper or more attractive products.
So-called born-global companies start out with a global focus because of their founders’ international experience10 and because advances in communications give them a good idea of the location for global markets and supplies.
Take SoundCloud, a Swedish audio-sharing web service.
Its cofounders—one born in England and one in Sweden—were previously knowledgeable enough about the German and U.S. markets to move into both within months of starting up.
Expansion of Cross-National Cooperation
Governments have come to realize that their own interests can be addressed through international cooperation by means of treaties, agreements, and consultation.
The willingness to pursue such policies is due largely to these three needs:
1. To gain 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
WHY COMPANIES ENGAGE IN IB
Let’s now focus on some of the specific ways firms can create value through IB.
Three major IB operating objectives:
1. Sales expansion
2. Resource acquisition
3. Risk reduction
SALES EXPANSION
A company’s sales depend on consumers’ demand.
Obviously, there are more potential consumers in the world than in any single country.
Now, higher sales ordinarily create value, but only if the costs of making the additional sales don’t increase disproportionately.
In fact, additional sales from abroad may enable a company to reduce its per-unit costs by covering its fixed costs—say, up-front research costs—over a larger number of consumers.
Because of lower unit costs, it can boost sales even more.
So increased sales are a major motive for expanding into international markets, and many of the world’s largest companies derive more than half their sales outside their home countries.
RESOURCE ACQUISITION
Producers and distributors seek out products, services, resources, and components from foreign countries—sometimes because domestic supplies are inadequate (such as industrial diamonds in the United States).
They’re also looking for anything that will create a competitive advantage.
This may mean acquiring any resource that cuts costs.
Sometimes firms gain competitive advantage by improving product quality or differentiating their products from those of competitors; in both cases, they’re potentially increasing market share and profits.
Most automobile manufacturers, for example, hire design companies in northern Italy to help with styling.
Many companies establish foreign R&D facilities to tap additional scientific resources.
Indian firms have recently followed foreign acquisition strategies to gain knowledge needed to compete globally.
Further, by operating abroad, companies gain diversity among their employees that can bring them new perspectives.
RISK REDUCTION
Selling in countries with different timing of business cycles can decrease swings in sales and profits (e.g., increasing sales stability through operations in countries that enter and recover from recessions at even slightly different times).
Moreover, by obtaining supplies of products or components both domestically and internationally, companies may be able to soften the impact of price swings or shortages in any one country.
Finally, companies often go international for defensive reasons.
Perhaps they want to counter competitors’ advantages in foreign markets that might hurt them elsewhere.
By operating in Japan, for instance, Procter & Gamble (P&G) delayed potential Japanese rivals’ foreign expansion by slowing their amassment of the resources needed to enter into other international markets where P&G was active.
IB OPERATING MODES
- When pursuing IB, an organization must decide on suitable modes of operations
MERCHANDISE EXPORTS AND IMPORTS
Exporting and importing are the most popular IB modes, especially among smaller companies.
Merchandise exports and imports are tangible products—goods—that are respectively sent out of and brought into a country.
SERVICE EXPORTS AND IMPORTS
For non-merchandise international earnings, the terms are service exports and imports and are referred to as invisibles.
The provider and receiver of payment makes a service export; the recipient and payer makes a service import.
1.Tourism and transportation
2. Service performance
3. Asset use
Tourism and Transportation
Let’s say that some U.S. fans take Korean Air to attend the 2018 Winter Olympics.
Their tickets on Korean Air and travel expenses in Korea are service exports for Korea and service imports for the United States.
Obviously, then, tourism and transportation are important sources of revenue for airlines, shipping companies, travel agencies, and hotels.
Service Performance
Some services, including banking, insurance, rental, engineering, and management services, net companies' earnings in the form of fees: payments for the performance of those services.
On an international level, for example, companies receive fees for engineering services rendered in turnkey operations, which are construction projects performed under contract and transferred to owners when they’re operational.
Asset Use
Companies receive royalties from licensing agreements, whereby they allow others to use some assets—such as trademarks, patents, copyrights, or expertise.
Companies also receive royalties from franchising, a contract in which a company assists another on a continuous basis and allows use of its trademark.
For instance, McDonald’s assists individually owned McDonald’s’ trademarked restaurants by providing supplies, management services, technology, and joint advertising programs.
INVESTMENTS
Dividends and interest from foreign investments are also service exports and imports because they represent the use of assets (capital).
Direct Investment
In foreign direct investment (FDI), sometimes referred to simply as direct investment, the investor takes a controlling interest in a foreign company.
When two or more companies share ownership of an FDI, the operation is a joint venture. (There are also non-equity joint ventures.)
Portfolio Investment
A portfolio investment is a noncontrolling financial interest in another entity. It consists of shares in or loans to a company (or country) in the form of bonds, bills, or notes purchased by the investor.
They’re important for most international companies, which routinely move funds from country to country for short-term financial gain.
WHY DO COMPANIES’ EXTERNAL ENVIRONMENTS AFFECT HOW THEY MAY BEST OPERATE ABROAD?
Smart companies develop the means to implement international strategies by examining the following conditions abroad that can affect their success:
Physical factors (such as geography or demography)
Institutional factors (such as culture, politics, law, and economy)
Competitive factors (such as the number and strength of suppliers, customers, and rival firms)
In examining these categories, we delve into external conditions that affect patterns of companies' behavior in different parts of the world and that influence companies to alter what they do domestically to fit foreign needs.
PHYSICAL FACTORS
Physical factors can affect how companies produce and market products, employ personnel, and even maintain accounts.
Remember that any of these factors may require a company to alter its operation abroad (compared to domestically) for the sake of performance.
Geographic Influences
Managers who are knowledgeable about geography are in a position to better determine the location, quantity, quality, and availability of the world’s natural resources and conditions.
Their uneven global distribution helps explain why different products and services are produced in different places.
Geographic barriers—mountains, deserts, jungles, and land-locked areas—often affect communications and distribution channels.
And the chance of natural disasters and adverse climatic conditions can make business riskier in some areas than in others while affecting supplies, prices, and operating conditions in far-off countries.
Keep in mind also that climatic conditions may have short- or long-term cycles.
Demographic Influences
Finally, countries’ populations differ in many ways, such as density, education, age distribution, and life expectancy.
These differences impact IB operations, such as market demand and workforce availability.
INSTITUTIONAL FACTORS
- Institutions refer to “systems of established and prevalent social rules that structure social interactions.
- Language, money, law, systems of weights and measures, table manners and firms (and other organizations) are thus all institutions.
Political Policies
Not surprisingly, a nation’s political policies influence how and if IB takes place.
Obviously, political disputes—particularly military confrontations—can disrupt trade and investment.
Even conflicts that directly affect only small areas can have far-reaching effects since these areas may produce important components needed for production elsewhere and because tourists’ fear prevents their travel to the entire region.
Legal Policies
Domestic and international laws play a big role in determining how a company can operate abroad.
Domestic law includes both home- and host-country regulations on such matters as taxation, employment, and foreign-exchange transactions.
International law—in the form of legal agreements between countries—determines how earnings are taxed by all jurisdictions.
As we point out in our closing case, international agreements permit ships’ crews to move about virtually anywhere.
Finally, the ways in which laws are enforced also affect a firm’s foreign operations.
In the realm of trademarks, patented knowledge, and copyrights, most countries have joined in international treaties and enacted domestic laws dealing with violations.
Behavorial Factors
- The related disciplines of anthropology, psychology, and sociology can help managers better understand different values, attitudes, and beliefs to help them make operational decisions abroad.
Economic Forces
Economics helps explain why countries exchange goods and services, why capital and people travel among countries in the course of business, and why one country’s currency has a certain value compared to another’s.
Economics also helps explain why some countries can produce goods or services for less.
It provides the analytical tools to determine the impact of an international company’s operations on the economies of both host and home countries, as well as the impact of the host country’s economic environment on a foreign firm.
THE COMPETITIVE ENVIRONMENT
In addition to its physical and social environments, every globally active company operates within a competitive environment.
Figure 1.1 highlights the key competitive factors in the external environment of IB: product strategy, resource base and experience, and competitor capability.
Competitive Product Strategy
Products compete by means of cost or differentiation strategies, the latter usually by
developing a favorable brand image, usually through advertising or from long-term consumer experience with the brand; or
developing unique characteristics, such as through R&D efforts or different means of distribution.
Using either approach, a firm may mass-market a product or sell to a niche market (the latter approach is called a focus strategy).
Different strategies can be used for different products or for different countries, but a firm’s choice of strategy plays a big part in determining how and where it will operate.
Company resources and experience
Other competitive factors are a company’s size and resources compared to those of its competitors.
A market leader, for example—say, Coca Cola—has resources for much more ambitious international operations than a smaller competitor like Royal Crown.
Royal Crown sells in about 60 countries, Coca-Cola in more than 200.
In large markets (such as the United States), companies have to invest much more to secure national distribution than in small markets (such as Ireland).
Competitors Faced in each Market
Finally, market success, whether domestic or foreign, often depends on the strength of competition and whether it is international or local.
Large commercial aircraft makers Boeing and Airbus, for example, compete almost only with each other in every market they serve.
What they learn about each other in one country is useful in predicting the other’s strategies elsewhere. In contrast, Walmart faces different local competition with customized local strategies in almost every foreign market it enters.