2011.02.cesa ib 02

RtB

Internaionalization

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Quantum Integration

INTERNATIONAL BUSINESS

Stephan Langdon, MBA, M.ED

The Globalizing Economy

Leading Exporting and Importing Countries

Leading Exporting and Importing Countries, continued

Top 25 Companies by Foreign Asset Ownership

Foreign Direct Investment

Developed countries get the bulk of FDI (69%) while developing countries get around 30%.

Least developed countries get minimal FDI.

Implications for managers—significant opportunities around the world.

Multinational managers should look at risk rating of countries.

The Internet and Information Technology

Electronic Communication — E-mail, World Wide Web, etc. Allows multinationals to communicate with

company locations throughout the world. Multinationals can also monitor worldwide

operations. Information technology is spurring a

borderless financial market.

The Rise of Global Products and Global Customers

The needs of customers for many products and services are growing more similar, e.g., McDonald’s, Boeing, Toyota.

Global customers search the world for their supplies without regard for national boundaries.

Privatization

Sale of government-owned businesses to private investors, usually through stock or direct sale to other

companies. Two types of privatization contribute to

the global economy — the developed world and the developing world.

Privatization—Types

The Developed Countries Use privatization to make formerly

government-controlled enterprises more competitive in the global economy.

The Developing Countries Use privatization to jump-start their

economies or to speed the transition from a communist to a capitalist system.

New Competitors

Free market reforms are creating a potential group of new competitors.

Korean, Russian, Taiwanese, and Mexican companies are all emerging.

Chinese companies are also on the move.

Top 25 Emerging Market Companies

New Competitors are Emerging Global trade has two important effects in

developing new competitors: When developing countries are used as

low-wage platforms for high-tech assembly, multinationals facilitate the transfer of technology.

Aggressive multinationals are also expanding beyond their own borders.

The Rise of Global Standards Companies can make one or only a few

versions of product for the world market. This is cheaper than making different

versions for different countries. Drive to develop common standards to

save money.

Global Standards

Consistency in quality also an important requirement of doing business in many countries.

International organization for standardization (ISO) in Geneva, Switzerland Developed a set of technical standards (ISO

9001:2000 series).

Internationalization

Internationalization is the process by which Firms increase their awareness of

the influence of international activities on their future

Establish and conduct transactions with firms from other countries.

5 reasons global sourcing programs1. To focus on core competencies

2. To reduce and/or variablize costs

3. To gain expertise that is not currently in house

4. To increase quality, efficiency, and speed of delivery

5. To be able to scale operations effectively

Source: ITESA

REZNOR CASE

Flat World and NIN

Berlin Wall Windows Netscape Browser Workflow

Flat World NIN

Flat World and NIN

Berlin Wall Windows

Netscape Browser Workflow

Global Market Websites Facebook.com Access Musician Work

Danial Lanois Pay Pal

Flat World NIN

Flat World and NIN

Uploading Outsourcing Offshoring Supply-chaining In-sourcing In-forming Steroids

Flat World NIN

Flat World and NIN


Flat World NIN

The world is flat . . . (Friedman)

Three converging developments A global, Web-enabled playing field that

allows multiple forms of collaboration Gradual adaptation of organizations through

horizontal collaboration in the value creation process extends this platform to different countries

3 billion people join the party - opening of economies like China, India, Russia, and in Eastern Europe, Latin America, and Central Asia to the world economy

Example of how triple convergence works

A global, Web-enabled playing field that allows multiple forms of collaboration is in place

A company installs an effective supply chain that allows it to source products from a country, e.g. India, Bangladesh, China, Ireland, etc.

A factory worker in China is able to benefit from global trade because his or her country has allowed information and products to flow “freely”

New “Arrivals”

Population data Population data

We are only seeing the tip of the iceberg. Not everyone has access yet Microsoft: in China, 1 in a million can mean

a total of 1,300,000 Bangalore: “we are hungry for success”

Its dominated by, but not all India Map of IT businesses

http://www.infoplease.com/ipa/A0004391.html

Why do Firms Internationalize? opportunities for growth market diversification higaher margins and profits Gain new ideas about products, services,

and business methods Better serve key customers that have

relocated abroad Be closer to supply sources, benefit from

global sourcing advantages, or gain flexibility in the sourcing of

products

Why do Firms Internationalize? 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 in the home market

Invest in a potentially rewarding relationship with a foreign partner

STEP

Political Social Economic Technological

Dimensions of Internalization

Internationalization has both inward-looking and outward-looking dimensions.

The outward-looking perspective incorporates an awareness of the nature of competition in foreign markets

Dimensions of Internalization (cont.)

Includes the following modes of activities: Exporting. Acting as licensor to a foreign company.

Establishing joint ventures outside the home country with foreign companies.

Establishing or acquiring wholly owned businesses outside the home country.


Similar to the Sequential Approach theory of internationalization:

As firms build confidence, experience and success:

Existing Business

New Business

Partially Owned Wholly Owned

(1) Capital Participation

(2) Joint Venture

(3) Acquisition

(4) Greenfield


Not all firms do or can follow the sequential process of internationalization: Dependent upon industrial and environmental conditions

Need to coordinate operations in many countries and many value chain activities


Internationalization affects firms in equally important ways from an inward perspective.

The related modes of activity include: Importing/sourcing. Acting as licensee from a foreign

company. Establishing joint ventures (JVs) inside the

home country with foreign companies. Managing as the wholly owned subsidiary

of a foreign firm


Many firms have an appreciation of the global environment but do not seek out international opportunities in countries that differ greatly

Questions to explore: What products/services can be “global”? How can a firm know if it has a globally

competitive product? How can the firm successfully take a

product global?


Theory


Theory

Types of Internationalisation

Upstream internationalisation

Downstream internationalisation

importoutsourcing

market entry

outwardinternationalisation

inwardinternationalisation

Implications for Your Project

Upstream Internationalisation (Supply chain management) Location of key suppliers Relationship with key suppliers Changes in number and frequency of changes Supply strategies , e.g. vertical integration

Downstream Internationalisation (Export management) Goals, relationships, strategies, organisational development

Degrees of Internationalisation

Degree of commitment/level of involvement (structure)

Degree of change within the firm (process)

International Product Life Cycle

Basic Assumptions The relative weight of changes in factors of production at various

stages of a product’s life cycle Changes in a product’s degree of market attractiveness

Implications for Internationalisation Extension of the life cycle of products Reduction in unit costs of production

Other useful concepts Product vs. Market lag Client-followers vs. Market searchers

The Network Approach to Internationalisation

Firms within an industrial market are inter-dependent

They share resources Their relationships are both stable and changing They are mutually vulnerable Markets are networks of relationships

Some Characteristics of a Network

Intensity Power sharing Reciprocity Cohesion, through

Domain consensus Positive evaluation Work co-ordination

FACTOR ENDOWMENTS (HECKSCHER – OHLIN)

Introduces concept of ‘factors of production’. A country will have a comparative advantage in producing

goods which make intensive use of factors of production which it has in abundance

A country exports products which use intensively its relatively abundant factors and

imports products which use intensively its relatively scarce factors

Leontief paradox

Industrial Clusters

A concentration of suppliers and supporting firms from the same industry located within the same geographic area

Examples include: the Silicon Valley, fashion cluster in northern Italy, pharma cluster in Switzerland, footwear industry in Pusan, South Korea, and the IT industry in Bangalore, India

Industrial clusters can serve as an export platform for individual nations

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

National Industrial Policy:Ireland as an Example

Beginning in the 1980s, the Irish government implemented a series of pro-business policies to build strong economic sectors. The “Irish Miracle” resulted from:

Fiscal, monetary, and tax consolidation Partnership with the industry and unions Emphasis on high-value adding industries

such as pharma, biotechnology, and IT Membership in the European Union; subsidies

and investment received from the EU Investment in education

FDI Based Explanations: Dunning’s Eclectic Paradigm

Three conditions determine whether or not a company will internalize via FDI:

1. Ownership-specific advantages – knowledge, skills, capabilities, relationships, or physical assets that form the basis for the firm’s competitive advantage

2. Location-specific advantages – advantages associated with the country in which the MNE is invested, including natural resources, skilled or low cost labor, and inexpensive capital

3. Internalization advantages – control derived from internalizing foreign-based manufacturing, distribution, or other value chain activities

The background - Uppsala

The firm is assumed to strive for growth and long term profit

The firm is assumed to avoid uncertainty and keep risk taking at a low level

The behavioral theory of the firm bounded rationality –

perfect decisons are infeasable

limited search satisficing behavior - meet

criteria for adequacy, rather than to identify an optimal solution

conflicting goals, Incremental adjustments

to changing conditions of the firm and its environment

Dynamic model (present state important for future changes and subsequent states)

State Aspects

Market knowledge

Information stored and retrievable in minds of individuals, computer memories or in written form

Objective or experiential – latter most crusial

Market commitment

Amount and specificity of resources committed to a market

(experiential knowledge may be one type)

Change Aspects

Commitment decisions

Response to perceived probalems/opportunities

High perceived uncertainty leads to low commitment

Increased (experiential) makret knowledge leads to lower preceived market uncertainty

Small steps unless very large resources

Current business activities

Prime source of market experience

Johanson & Vahlne – 1990 (1) Stages model is one

possible manifestation of the State and change aspects model

Internationally experienced firms may allocate resources on the basis of real market conditions rather than in response to the unknown

Validity of model mainly in early stages (low experiential knowledge and high uncertainty)

World more internationalized and homogeneous

Psychic distance smaller and market knowledge less country specific

Johanson &a Vahlne – 1990 (2) Service firms may

internationalize in a different manner

Internationalization processes should be related to processes in the environment (market, network, industry, technology, etc.)

Behavioral model could be supplemented by economic models

Strategic thinking should supplement emergent development, chance, and necessity

The stage model

TWO

Moving Forward

Friedman’s view of a “flat world” “Flatteners” or developments that

helped create this flat world Summarize these flatteners into his

notion of a “triple convergence”

Flat World

Globalization 1.0 (1492-1800): discovery that the earth was round, exploration, European powers expand their power, including trading reach

Globalization 2.0 (1800 – 2000): multinationals followed their countries

Globalization 3.0 (2000- ): individuals of diverse backgrounds able to collaborate and compete globally

Flat World

Playing field has been flattened traditional advantages accruing to one country

or a large multinational are being challenged Coefficient of globalization

Completion for global knowledge work Intellectual work, intellectual capital, can

be delivered, distributed, produced, and put back together again . . . with relative freedom in the way we do work

WHAT IS THE SIGNIFICANCE OF ALL THIS?

Significance of Flat World

Level playing field Traditional, comparative advantages

held by those with access to information and/or technology can now be challenged

Individuals from non-traditional backgrounds can now engage in economic activity, at times in ways not seen before

FLATTENERSFIRST THREE ARE PLATFORMS CONTRIBUTING TO COLLABORATION

Flatteners: first three are platforms contributing to collaboration

11/9: the fall of the Berlin Wall opening Windows Fall of the “Wall” between East and West Berlin Political systems that were once closed opened

up Windows

8/9: Netscape goes public Emergence of an internet browser

Work flow software: Development of software which when installed

in different computers and in different places allows them to work with each other

11/9 as a platform for collaboration

11/9: the fall of the Berlin Wall which separated East and West Berlin and Germany

The fall of the “wall” resulted in the eventual collapse of countries that were part of the Council for Mutual Economic Assistance or COMECON, sometimes referred to as the “Eastern bloc”, or

the Soviet empire Included in this “bloc” were countries like the

Czech Republic, Bulgaria, Romania, East Germany, Poland, etc.

Friedman’s claim

this event tipped balance of power across the world towards more democratic, free-market oriented governments

11/9 as a platform for collaboration (Continued)

Centrally planned countries “opened up” In 1991, India abolished trade controls China accelerated reforms (although some of

china’s economic reforms started in the 70s) Global exchange of digital information

now possible as political restrictions eased up Huge personal empowerment

8/9 as a platform for collaboration

8/9: Netscape goes public The initial browser was Mosaic which was

designed to allow researchers/scientists in remote locations to access each other’s work

Mosaic was transformed into the first browser to be made available to the public (for free)

Coupled with introduction of Windows 95, including GUI capability, these made accessing the internet much easier Early access to the internet were text based

8/9 as a platform for collaboration (Continued)

Browsers as gateway to Internet From internal systems to systems of

systems Dot com bubble allowed massive

investments in the internet highway; by the time the bubble burst, an initial physical infrastructure – fiber optic cables, switches, etc. – was in place

From resistance to email and cell phones (early 90s) to emergence of terms like B2B and B2C.

Work-flow software as a platform for collaboration

Work flow software: software that allows computers and in different places to communicate and work with each other using different modes, e.g. audio, video, etc.

Example: Wild Brain produces cartoons in SF Recording sessions Design and direction Writers Animation All in different locations using Virtual Private

Network (VPN)

Work-flow software as a platform for collaboration (Continued)

Example 2: Pay Pal Emergence of protocols and standards to

facilitate communication among systems

FLATTENERS: THE NEXT SEVEN ARE NEW FORMS OF COLLABORATION

Flatteners: the next seven are new forms of collaboration


Flattener 4: Uploading

Power or capability of individuals to send up, out, and around their own products and ideas Apache – a web server that allow web

browsers (in different computers) to interact with different web servers. Web servers allow a user to use his or her home or office to host a web site.

Flattener 4: Uploading (Continued)

Open source communities “community rules” Examples:

Linux operating system - offers a family of operating systems; can be adapted to run on the smallest desk top computer, laptop, palm pilot, etc.

Firefox (Mozilla) Blogging, Wikis, etc.

Flattener 5: Outsourcing

India as an example of how outsourcing began

Educational infrastructure in India 7 Indian Institute of Technology 6 Institute of Management As a result, Indian nationals would go to the US

or developed countries to find work Dot-com boom created “physical highway”

to allow for India to get “connected” Reform of telecommunications system in

India

Flattener 5: Outsourcing (Continued)

US companies start looking for opportunities to utilize labor pool in India

Late in the 1990s, the Y2K issue emerged

Indian “expats” return to India after “dot.com bubble” burst

Friedman sees the massive amount of programming to prevent a “Y2K” disaster and return of expats catalysts India’s emergence as an outsourcing destination

Flattener 6: Offshoring

Offshoring: move a strategic process or portion of a company’s value chain to a foreign location

Distinction Outsourcing: have another company do a

specific, but limited function, e.g. accounting

Offshoring: move production or an important process offshore

Flattener 6: Offshoring (Continued)

China as an example of the emergence of offshoring

1977: Deng Xiaoping starts economic reforms in China

Mid 1980s: applies for membership in WTO

Finally accepted into WTO mid 1990s Watershed moment in the sense that as a

member of WTO, China has to play by international rules

Flattener 6: Offshoring (Continued)

Example: ASIMCO From efforts to find “new china” managers to

manage their business to investing in the US US operation takes care of finishing, also allows

company to keep abreast with technology Film: China Brands Friedman does mention possible limits to

growth in China, including need for further reforms

Work-types companies avoid offshoring

Relationship-oriented work Process where repeatable process map cannot be

created Roles with complex industry structure and/or long

product learning curves Success criteria are not well defined or

measurable Strategic aspect to the business High levels of sensitive intellectual property are

shared across wide groups of people

Work-types companies push offshoring

High transaction volume High repeatability Low domain knowledge needed Low mission criticality Few touch points Low complexity Low training efforts Non-strategic Well defined process and metrics Easily transmitted over electronic wires Outcomes can be easily managed

India Advantages

Low cost Native English Early market entrance

Governmental software export strategy since 1972

Early adoption to quality standards Strong educational programs Government incentives

Technology park development Tax advantages and tax breaks Low import duties

India Disadvantages

Geo-political risk with Pakistan Electrical Power issues 24 hour travel Time zone Costly Turnover Salaries rising 20% annually for skilled workers Mid-manager staffing difficulties Cultural differences

Brazil Advantages

Low cost Time Zone and Proximity Early adoption to quality standards Strong educational programs Multilingual Support (Spanish and Portuguese

support) Government incentives

Technology park development (but need more) Tax advantages and tax breaks

Brazil Disadvantages

Corruption Lack of Qualified People Delays Infrastructure IP Problems English Brain Drain Higher cost than India and China Poor infrastructure especially off coast High sunk cost Costly turnover

China Advantages

Scale Labor Speed Low cost Strong educational programs and joint university

programs Government incentives

Technology park development Tax advantages and tax breaks

China Disadvantages

Focus on Asia English Cultural differences and inward thinking Uncertain governmental actions Communist effect on property laws Communist bureaucracy Intellectual property theft is rampant Data Privacy Poor infrastructure especially off coast Manufacturing focus Poor customer service Need for local representation/local partner Indian offshore companies are having problems with

offloading their own work to China

Flattener 7: Supply Chaining

Wal-Mart as an example of a company that pursues supply chain management aggressively

Coefficient of Globalization Learning to sell new products: sushi

Flattener 8: Insourcing

World Synchronized: Supply Manager Trust through systemes Toshiba Repairs Shoes.com UPS

Flattener 9: In-forming

In-forming: capability to build your own supply chain . . . of information, knowledge, entertainment

Flattener 10: Steroids

Computing capability has increased in terms of computational, storage, and input/output capacity

Instant messaging and file sharing VOIP Video conferencing Computer graphics Wireless communication