International Business Session 1. What is International Business? Business transactions between parties from more than one country Sourcing, Manufacturing,

International BusinessSession 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 ObjectivesLearn 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 integration6. Understand the EU’s role in the global

marketplace

International vs. DomesticOPPORTUNITIES

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. DomesticOPPORTUNITIES

5. Gain access to lower-cost or better-value factors of production

6. Develop economies of scale in sourcing, production, marketing, and R&D

7. Confront international competitors more effectively or thwart the growth of competition in the home market

International vs. DomesticRISKS1. Cross-cultural risk: a situation or event

where a cultural miscommunication puts some human value at stake

2. Country risk: potentially adverse effects on company operations and profitability holes by developments in the political, legal, and economic environment in a foreign country

3. Currency risk: risk of adverse unexpected fluctuations in exchange rates

4. Commercial risk: firms potential loss or failure from poorly developed or executed business strategies, tactics, or procedures

Basic Indicators of International BusinessBalance of Payments

◦http://www.cnb.cz/en/statistics/bop_stat/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

7-11Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

Major Components of the BOP Accounting System

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Current Account

Capital Account

Official Reserves

Errors and Omissions

Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

Table 7.6. U.S. Balance of Payments in 2007

7-13Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

Population vs. GDPas percentage of world total

World Population 2010

Demographics

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Population Pyramids

China India

Purchasing Power Parity (PPP)

World GDP 2008

Per Capita GDP

Doing BusinessProduced by World BankEvaluates business regulations

and enforcement180+ countries10 categories of data

www.doingbusiness.org

National Business Environment1. 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 Environment4. 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 medium-size company must pay or withhold in a given year, as well as measures of the administrative burden in paying taxes.

National Business Environment8. 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 ResourcesCountry Financial and Demographic info

◦ http://www.worldbank.org◦ https://www.cia.gov/library/publications/the-world-

factbook/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

Why do nations trade?

Protectionism Free Trade

◦Mercantilism◦Jobs◦Defense◦Infant Industry

◦Comparative Advantage

◦Competitive Advantage

Perspectives of the Nation and the Firm

Comparative advantageIs the concept that helps answer

the question of all nations can gain and sustain national economic superiority

Competitive advantageIs 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 created

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 flat-panel 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 low-cost capital on global markets

Some services do not lend themselves to cross-border trade

Michael Porter’s Diamond Model:Sources of National Competitive

Advantage1. Firm strategy, structure, and rivalry –

the presence of strong competitors at home serves as a national competitive advantage

2. Factor conditions – labor, natural resources, capital, technology, entrepreneurship, and know how

3. Demand conditions at home – the strengths and sophistication of customer demand

4. Related and supporting industries – availability of clusters of suppliers and complementary firms with distinctive competences

Porter’s Diamond of National Competitive Advantage

Firm Strategy, Structure,

and Rivalry

Related and SupportingIndustries

FactorConditions

DemandConditions

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 incentivesMonetary and fiscal policiesRigorous educational systemsInvestment in national infrastructureStrong legal and regulatory systems

“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

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Globalization

Growth of relations between nations and cultures or between institutions situated in different nations or cultures.

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Internationalization

What’s the difference?

Globalization InternationalizationGrowing world

systemsTransnational,

Subnational and Supranational actors

Driven by free markets and technology

Relations between nations

Nation state is central actor

Driven by national interests

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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 Curve3. Opening of Countries (3 billion

people) USSR, Central Europe, China, India, South

America Market economies and integrated financial

system

Top Global Brands (select industries)

Cars

1 Toyota

2 BMW

3 Porsche

4 Mercedes

5 Honda

6 Nissan

7 Ford

8 Chevrolet

9 VW

10 Lexus

Mobile Operators

1 China Mobile

2 Vodafone

3 Verizon Wireless

4 NTT DoCoMo

5 Orange

6 AT&T

7 T-Mobile

8 Movistar

9 MTS

10 TIM

Beer

1 Budweiser

2 Bud Light

3 Heineken

4 Corona

5 Stella Artois

6 Guinness

7 Miller Light

8 Skol

9 Amstel

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Beck’s

Major Companies in Non-Triad Markets

Mahindra & MahindraOrascomLenovo InfosysWiproSABMillerEmbraer RanbaxyHaierTata

Major Companies in Non-Triad Markets

Mahindra & Mahindra

OrascomLenovo InfosysWiproSABMillerEmbraerRanbaxyHaierTata

India AutomotiveEgypt CellularChina ComputersIndia SoftwareIndia Tech

ServicesSouth Africa BrewingBrazil AircraftIndia

PharmaceuticalsChina AppliancesIndia 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