BU669 Session 1 International Business

1
BU669 Session 1 International Business

• Dr. Hugh Munro

2
Agenda

• Review Course Objectives, Requirements Trip
  Update
• International Business, International Strategy
  Internationalization
• Global Company
• Environmental Influences on International
  Business Higgins Case
• FINS set-up
• Summary
• Next Session

3
Course Objectives

• Appreciation for and skills in addressing complex
  issues faced in international business
• Decision-making framework to assist with market
  opportunity assessment, market entry mode and
  strategy, structuring managing joint venture
  alliance relationships, ongoing management of
  international operations
• Develop skills in structuring and negotiating
  business relationships with public and private
  stakeholders in an international context
• Opportunity to experience an international
  business context

4
Performance Assessment

• Participation 20
• Simulation 30
• Report 50

5
Trip Updates

• Australia-NZ set, need to finalize meetings,
  visa check, packages coming
• Eastern Europe three teams one for each
  country to set up meetings, visas, payments

6
Objectives Part One

• Define international business and how it differs
  from domestic business
• Explain why companies engage in international
  business
• Introduce different international business models
  companies use
• Illustrate the role social science plays in
  understanding international business
• Provide an overview of patterns for international
  expansion
• Describe the forces that affect international
  business

1-2
7
Questions For Discussion Part One

• What constitutes a global company? Criteria?
  Examples?
• Drivers of globalization?
• Globalization good or bad?

8
International Business Perspectives

• World
• Regions
• Country
• Industry
• Company
• Individual

9
Reasons for Growth in International Business

• Rapid increase in and expansion of technology
• Transportation is quicker while costs are lower
• Communication enables control from afar
• Liberal government policies on trade and
  resources
• Development of institutions that support
  international trade
• Consumer pressures
• Increased global competition

1-6
10
Examples of Reduction inTrade Barriers

• General Agreement on Tariffs and
  Tradewww.gatt.org
• World Trade Organization (WTO)www.wto.org
• North America Free Trade Agreement www.nafta.org
• European Union (EU)europa.eu.int
• Asia Pacific Economic Cooperationwww.apec.org

11
Chinas First Year in WTO Procrastination or
Progress? EDC Winter 2003 (www.edc.ca)

• Telecommunications reforms are incomplete but
  rules for operating licenses becoming clearer
• Intellectual Property Rights laws regulations
  in place enforcement is the challenge
• Auto Sector tariffs reduced but licenses
  problematic
• Insurance up to WTO regulatory standards but
  issues with transparency, capital solvency
  requirements, licensing
• Agriculture problematic standards
  legislation unpredictable
• Banking restrictions 1 branch per year,
  capital per branch

12
China Pays Off At Last Wall Street Journal
(www.wsj.com)

• China has turned into a profitable domestic
  market in a relative short time
• 64 of 200 US companies in China are profitable
• Profits from 31,000 foreign-invested mfg
  companies rose 13 in 2001
• China is now Kodaks second largest market
• Frances Group Danne Sa built a 1.2 bil
  business in China profitable
• Siemens China now 3 market
• KFC new store every other day gold mine for
  them

13
Industry Globalization Drivers

• Market Drivers - customers channels
• Cost Drivers - scale, sourcing, development
  efficiencies
• Government Drivers - free trade, standards,
  regulation, development initiatives
• Competitive Drivers - activities, globalization

14
Why Engage in International Business

• Expand sales
• Volkswagen (Germany)
• Ericsson (Sweden)
• IBM (United States)
• Acquire resources
• Better components, services, products
• Foreign capital
• Technologies
• information
• Minimize risk
• Take advantage of the business cycle for
  products/services
• Diversify among international markets

1-5
15
Global Strategy Levers

• Global Market Participation
• Global Products Services
• Global Location of Activities
• Global Marketing
• Global Competitive Moves

16
Scope of International Business

• A. Outward Activities
• Exporting
• Licensing
• Joint Ventures
• Direct Investment
• B. Inward Activities
• Importing/Sourcing
• Licensee
• Domestic JV partner
• Subsidiary of Foreign Parent

17
Operations and Influences
1-10
18
Key Players InInternational Business

• Multinational Corporation
• Business that has direct investments abroad in
  multiple countries.
• Entrepreneurs and Small Businesses
• Small companies are becoming increasingly active
  in international trade and investment.

19
Gross Domestic Product (GDP)

• Value of all goods and services produced by a
  countrys domestic economy over a one year period.

20
Internationalization Company Exercise

• What characteristics reflect a global company?
• Examples ?
• Implications?

21
Global Organization

• Structure
• Management Processes
• People
• Culture

22
Characteristics of a Transnational Oriented
Company

• Focus/vision - complexity of world differences
  similarities
• Orientation - Geocentric vs Poly or Ethno
• Mktg Strategy - extension,adaptation,creation
• RD Strategy - integrated across regions
• HR Policy - best people
• New Product Developt - global mkt needs
• Manufacturing - lowest cost for global needs
• Financial Policy - global sourcing
• Investment Policy - cross-subsidization
• Operating Style/Communications - integrated,
  interactive across up
• Partnerships - competencies for world leadership
• Score Keeping - share of world mkt
• Attitude/Mindset - Capabilities - Activities -
• Performance

23
Stages of International Development
24
A Transnational Company

• Links
• the markets of the world
• the resources of the world
• on a profitable basis

25
Patterns of Internationalization
Figure 1.7
1-16
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The Backlash Against Globalization

• Many protestors complain that the world is not
  sharing equitably the fruits of globalization.
• A concern of other anti-globalization protestors
  is the fear that globalization is homogenizing
  the world and destroying the rich diversity of
  cultures it contains.
• Evidence also suggests that theinfluence of
  developing nations music, art, and literature
  has grown (not shrunk) throughout the last
  century.

27
Global Manager
28
BU 669 Part Two

• The Global Business Environment

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Part Two Objectives

• Understand gain an appreciation for the global
  business environment cultural, political,
  economic factors that influence international
  business
• Discuss their implications for developing
  executing international business strategy

2-2
30
Questions for Discussion Part Two

• John Higgins Case
• Pop culture global consumer?
• Religious beliefs work? Consumption?
• Cultural relativism vs. cultural normativism?
• Totalitarian vs democratic political system?
• Political risk?
• Financial statements of Canada vs. trip countries?

31
Influences on International Business

• External Influences
• Physical/Societal factors
• Political policies and legal practices
• Cultural factors
• Economic factors
• Geographical influences
• Competitive environment

• Operations
• Objectives
• Strategy
• Means

1-11
32
Increased Uncertainties Associated with
International Business

• General Environmental Uncertainties Political
  (War, Coup, Revolution), Government Policies
  (Price Controls, Repatriation, etc.)
  Macroeconomic (inflation, foreign exchange),
  Social (concerns, protests), Natural
  (earthquakes)
• Industry Uncertainties Input Market (quality,
  supply), Product Market (consumer tastes,
  substitutes, complementary products), Competitive
  (rivalry, new entrants, technology)
• Firm Uncertainties Operating (labour, input
  supply, production), Liability (product,
  environment), RD, Credit, Behaviour

33
Organizational Responses to Uncertainties

• Financial Risk Management contracts, insurance
• Strategic
• - Avoidance
• - Control
• - Cooperation
• - Imitation
• - Flexibility Diversification, Operational

34
Management in International Business

• In additional to domestic business management
  skills, international business management
  requires
• Social science understanding
• Political science appreciation
• Legal awareness
• And an innate ability in
• Anthropology
• Sociology
• Psychology
• Economics
• Geography

1-4
35
What is Culture?

• Culture the set of values, beliefs, rules, and
  institutions held by a specific group of people.

36
Culture - learned norms based on attitudes,
values, beliefs

• Approaches - ethnocentric, polycentric,
  geocentric
• Areas Most Affected
• Business Protocol
• Communications
• Negotiations
• Marketing Mix
• Mgt of JVs Subs

37
Components of Culture
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Kluckhohn-Strodtbeck Framework

• Relationship to nature
• Time orientation
• Trust and control
• Accomplishments in Life
• Relationship with others
• View of personal space

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Hofstede Framework
40
Crouching Tiger Globe Mail, Saturday Jan 11,
2003

• Transitioning communist Welfare State (Iron
  Rice Bowl) to Capitalism, Consumerism,
  Darwinism
• Pace of Change stress
• Class of values
• Physical Mental Health Consequences

41
Ethnocentricity

• Ethnocentricity is the belief that ones own
  ethnic group or culture is superior to that of
  others.
• Problem with Ethnocentricity
• It causes people to view other culture in terms
  of their own, causing them to overlook important
  human and environmental differences among
  cultures.

42
North American Values

• COMPETENCE!
• Intolerance for discrimination based upon
• Gender
• Race
• Age
• Religion
• Although equality is not applied perfectly, in
  many other cultures, this competence is of
  secondary importance
• Since our values may seem radical to foreigners
  it is of extreme importance that international
  businesses spend the resources to determine what
  foreign cultures they can ethically and
  effectively conduct business in

2-9
43
Major Cultural Issues

• Problems arise in international business when
• Employees have subconscious reactions
• Employees assume all societal groups are similar
• A company implements practices of work less well
  than intended
• Employees encounter distress because of an
  inability to accept or adjust to foreign cultural
  behaviors
• Companies/employees are insensitive to foreign
  consumer preferences

2-3
44
Cultural Orientations

• International businesses adopt an attitude
  towards foreign cultures
• Polycentrism control is decentralized so
  regional managers can conduct business in a local
  manner
• Ethnocentrism belief that ones own culture is
  superior and ignores important factors
• Geocentrism a hybrid of polycentrism and
  ethnocentrism, the middle ground
• Companies MUST evaluate their practices to ensure
  they account for national cultural norms

2-18
45
Cultural Relativism vs Normativism

• Relativism Ethical truths depend on the groups
  holding them thus intervention in local
  traditions is seen as unethical
• Normativism universal standards of behaviour
  everyone should follow thus making
  non-intervention unethical
• Which is right?

46
Standardized vs Responsive Practices

• Global standardization advantages
• Reduced costs in development and manufacturing
• Economies of scale since fixed costs are spread
  over more units of production
• Responding to national preferences
• Adjusting operating, marketing, and design to
  meet specific national preferences

1-17
47
John Higgins Case

• Higginss and Prescotts attitudes towards
  implementing U.S. personnel policies in Japan?
• Major Reasons for differences?
• If you were Weavers Manager of Japan Operations
  what would you do about this conflict?

48
Tolerance, Knowledge, Skills

• Tolerance
• A sensitive awareness of the beliefs and
  practices of other peoples that differ from or
  conflict with ones own.
• The first step in developing tolerance toward
  other cultures is to understand their histories.
• International Business Knowledge And Skills
• The type of knowledge and skills required can
  include the ability to design effective
  promotional strategies abroad, manage an
  international sales force, manage risk in
  international financial markets, and communicate
  effectively across cultures.

49
Maintaining A Global Mindset

• Maintaining a global mindset means keeping up on
  social, cultural, political, and economic events
  and trends.
• Maintaining a global mindset means not allowing
  oneself to fall into the trap of stereotyping
  groups of people as a result of current events.

50
Keys to Success

• Organizations must understand cultural
  differences
• Organizations must be culturally literate in
  order to avoid misunderstanding
• As companies enter into the international market,
  localizing business policies and practices can
  help managers to succeed

51
Review of Culture

• Understand cultural environments
• Explain major causes of cultural difference and
  change
• Examine behavioral factors influencing countries
  business practices
• Examine cultural guidelines for companies that
  operate internationally

2-20
52
Political, Legal, Environmental Influences
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Political Risks for International Business

• Opinions of political leadership
• Civil disorder
• Economic conditions
• Human rights violations
• Group animosity
• Procurement difficulties
• Work stoppages
• Shipment delays
• Property damage
• External relations between home and host country

3-11
54
Political Strategies for International Businesses

• Identify the exact issue
• Trade barrier?
• Environmental standards?
• Workers rights, etc?
• Define/determine the political aspect of the
  issue
• Assess the potential political action of other
  companies
• Identify important institutions and individuals
• Formulate strategies
• Key objectives
• Alternatives
• Probable effectiveness

3-13
55
Legal Environment

• Common law systems (tradition/precedent)
• United States
• United Kingdom
• Civil law (rules of business are part of the
  countries code)
• Germany
• France
• Japan
• Theocratic law (based on religious precepts)
• Sudan
• Pakistan

3-14
56
Legal Issues for International Businesses

• Worker relations
• Health and safety standards
• Workweek
• Employment practices
• Antitrust prohibitions
• Contractual relationships
• Environmental practices
• Patents, trademarks, and intellectual property
  protection
• Taxes and reporting requirements

3-15
57
Economic Issues for International Businesses

• What type of economic system does the country
  have?
• What is the size, growth potential, and stability
  of the market?
• Is the companys industry in that countrys
  public or private sector?
• If public, does the government allow private
  competition?
• If private, is it moving towards public ownership?

4-3
58
Economic Issues for International Businesses, cont

• Does the government view foreign capital as
  competition with or in partnership with public or
  local private enterprises?
• How does the government control the nature and
  extent of private enterprise?
• How much of a contribution is the private sector
  expected to make in assisting the government
  formulate overall economic objectives?

4-4
59
Key Economic Forces

• General economic framework
• Economic size and stability
• Existence and influence of capital markets
• Factor endowments
• Indicators
• Growth
• Inflation
• Surpluses
• Deficits
• Economic transitions
• Availability of economic infrastructure

4-5
60
Factor Conditions

• Inputs to the production process
• Human resources
• Physical resources
• Knowledge
• Capital
• Infrastructure
• Factor conditions are especially critical for the
  production of goods

4-6
61
Demand Conditions

• Market potential
• Composition of home demand (nature of buyer
  needs)
• Size of home demand
• Growth of home demand
• Internationalization of demand
• Demand conditions are
• especially critical for
• market-seeking
• investments

Composition? Size? Growth? Internationalization?
4-7
62
Gross National Income

• Tool to measure one country against another
• Size
• Demand
• Gross National Income (formerly the Gross
  National Product)
• GNI is the market value of final goods and
  services newly produced by domestically owned
  factories of production.
• Countries with high populations and high per
  capita GNI are most desirable in terms of market
  potential

4-8
63
Gross Domestic Product

• GDP the value of production that takes place
  within a nations borders, without regard to
  whether the production is done by domestic or
  foreign factors of production
• Example -
• Both a Ford and Toyota manufactured in the United
  States counts towards our GDP
• A Ford produced in Mexico would not

4-9
64
Importance of Per Capita GNI
4-10
65
Countries Classified by Economic System
4-13
Figure 4.2
66
Economic Freedom

• Market Economy resources are primarily owned and
  controlled by the private sector, not the public
  sector
• Consumer sovereignty is the right of consumers to
  decide what to buy
• Prices are determined by supply and demand

4-14
67
Economic Freedom, cont

• Command Economy (Centrally Planned Economy) all
  dimensions of economic activity, including
  pricing and production decisions, are determined
  by a central government plan
• Government owns and controls all resources
• Prices are determined by government

4-15
68
Economic Freedom, cont

• Mixed Economy Some degree of government
  ownership and control
• No economy is purely market or command
• Economic systems are along a spectrum of freedoms
• Most command economies are moving towards a
  market economy

4-16
69
Economic Factors International Businesses Must
Address

• Inflation
• Surpluses
• Deficits
• Balance of Payments
• External Debt
• Internal Debt
• Privatization

4-17
70
Reforms and Economic Progress
Figure 4.3
4-18
71
Global Competitive Advantage
5-15
72
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FDI and Balance-of-Payments Effects

• Countries that run trade deficits must compensate
  for that deficit by
• Reducing its capital reserves, or
• Attracting an influx of capital
• Foreign aid
• Receipt of credit
• Receipt of foreign investment (FDI)

11-10
75
Country Risk Ratings

• GNP Per Capita - ()
• Propensity To Invest - ()
• Reserves to Import Ratio - ()
• Current Account Balance - ()
• Export Growth Rate - ()
• Export Variability - (mixed)
• Net Foreign Debt To Exports - (-)
• Debt Service Difficulty - (-)
• Political Instability - (-)
• Ratings Provided By - Euromoney, Institutional
  investor

76
BU669

• FINS Exercise

77
Players in FINS

• 3 Multinationals Megatronics, Eurodata, Tanaka
• 2 Governments of Developing Countries
  Tropicalia, Paradiso
• 4 local companies Tropimatics Systrop in
  Tropicalia Electro Paradys Parafino in Paradiso

78
Issues For Individual Players

• MNCs Tropicalia or Paradiso or both? Type
  size of Plant?
• Local Companies Enter industry? Alone or
  Partner? Plant type size?
• Government Industry structure ownership to
  allow? Incentives? Other government free trade?

79
Issues Between MNCs Local Companies

• License, subcontract, JV, other?
• Owbership s
• Mgt responsibilities Control
• Technology transfer
• Local market or export
• Size Type of plant
• Transfer pricing imports/exports

80
Issues Between MNCs Government

• Plant size type
• Number of manufacturers allowed
• Tariff protection
• Foreign ownership allowed
• Technology transfer conditions
• Pricing regulations
• Export and local content requirements
• Tax financial incentives
• Repatriation of profits

81
Issues Between Local Companies Governments

• Incentives Special consideration
• Degree of support with MNCs
• Number of manufacturers
• Tariff Protection
• Tax, financial export incentives
• Plant location

82
Issues Between Local Companies

• Cooperate or compete
• If cooperate independent or joint operations?

83
Issues Between Governments

• Cooperate or compete?
• Free Trade?

84
Initial Strategy Report Due Beginning of
February 8th Session

• Strategy supporting analyses push the numbers
• Player assessment partnering options
• Negotiating objectives strategy/tactics
• Desired outcomes
• Deal makers breakers
• Contingencies

85
Performance Assessment

• Quality of reports presentation
• Soundness of agreements e.g., financial
  consequences, competitive positions
• Negotiating strategy/tactics
• Lessons learned

86
Contributions of MNEs
11-9
87
Home-Country Losses

• Displaces jobs
• Technology transferred abroad
• Loss of output
• Loss of exports
• Declining wages
• Replace local companies
• Loss of best resources
• Destroy local entrepreneurship
• Decrease local RD undertakings

11-11
88
Home-Country Gains

• Increase in demand and wages for skilled-labor
• Lower prices
• Higher product demand
• More optimum use of production factors
• Use of unemployed resources
• Upgrading of resource quality
• Ability to observe foreign competitive conditions

11-12
89
Economic Integration

• NAFTA , EU, Asia Pacific
• Evolution?
• Implications?

90
Summary

• Strategic Importance of International Business
• Added complexity regular business issues
  influences of very different environment
• Understanding the environmental influences
  their implications for strategy implementation
• Challenges to managers
• Your career

91
Next Session

• Decision making framework Cameron A B
• Standardization vs. customization
• Off-shore sourcing
• Ongoing management of global operations look at
  cases in text