International Business Environment

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International Business Environment

• INTERNATIONAL
• MANAGEMENT

Chapter 2
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International Business Environment The Trend

• Intense competition among industries, firms and
  countries on a global level is a recent
  development.
• The present trends are towards the increasing
  globalization and interdependence of firms,
  markets and countries.
• In a bid to meet commitments to institutions like
  WTO, IMF and WB, country after country is pulling
  down barriers to foreign trade and investment.

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• There is a growth of organization and
  administrative structures to manage resources and
  risks across national boundaries.
• Quantitative restrictions on foreign trade are
  being dismantled speedily and tariff barriers are
  on the decline.
• New opportunities to foreign investors and
  entrepreneurs are being provided to operate in
  the countries.
• The MNCs are expanding their operations by
  aggressively adopting marketing strategies to
  local conditions.

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• In the coming years there may be extinction of
  many business and considerable realignments in
  many others by M A, etc.
• In future MNCs will gear up their activities due
  to the presence of huge potential market.
• Many firms having indigenous technology in less
  developed economies will fail to compete with the
  MNCs.
• Number of small units may close up their
  activities or may merged with the big companies.

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Internationalization-Why?

• Process by which firms increase their awareness
  of the influence of international activities on
  their future, and establish and conduct
  transactions with firms from other countries.
• Reasons to become international

Desire for continued growth
Domestic market saturation
Unsolicited foreign order
Potential to exploit new technological advantage
Clear evidence - Strong correction exists between
improved performance and degree of
internationalization
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Internationalization

• Pull factors Push Factors
• (Proactive reasons) (Reactive reasons)
• Pull factors are forces of attraction which pull
  the business to the foreign markets.
• Push factors are forces of compulsion which
  prompt companies to internationalize.

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Pull Factors Push Factors

• Relative Profitability Domestic market
  constraints
• Growth Prospects Competition

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Profit Advantage

• Even when international business is less
  profitable than the domestic, it would increase
  the total profit.
• The AC per unit will be lowest if the plants is
  operated at optimum capacity OQ1
• Domestic demand constraint makes it to produce
  OQ and hence AC is OC or QR much higher than OC1
  or Q1I. AC to the extent of CC1 can be reduced by
  exporting QQ1 amount and the profitability will
  increase per unit by CC1 per unit.

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R
AC
C C1
I
0 Q Q1
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Growth Opportunities

• MNCS are getting increasingly interested in a
  number of developing countries due to the rapid
  rise of income and population in these countries.
• 1 billion people estimated to be added to the
  world population between 1999 and 2014.
• For going international is to take advantage of
  the opportunities in other countries

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Domestic Market Constraints

• Domestic demand constraints drive many companies
  to expand the market beyond the national border.

TS DS
FS
Sale
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• For Example
• Nestle derives only about 2 of its total sales
  from its to home market, Switzerland.
• For Philips, only 8 of the total sales coming
  from the home market, Holland, but many different
  subsidiaries of Philips have contributed much
  larger share of the total revenues than the
  parent company.

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Competition

• Protected market does not normally motivate
• Companies to seek business outside the home
  market.
• Economic liberalization brings competition from
  foreign firms as well as from those within the
  country.
• Companies take an offensive international
  competitive strategy by way of counter
  competition.
• To penetrate the home market of the potential
  foreign competitor so as to diminish its
  competitive strength to protect domestic market
  share.

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Dimensions of Internationalization

• Inward-looking Outward-looking
• (Impact of global (Nature of
• competitors on competition in foreign
• domestically market)
• oriented firms)

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Inward-looking( Impact of global competitors on
domestically oriented firms)

1. Importing/sourcing
2. Acting as Licensee from a foreign company
3. Establishing JV inside the home country with
   foreign companies
4. Managing as a wholly owned subsidiary of a
   foreign firm.

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Outward-Looking(Nature of competition in foreign
market

1. Exporting
2. Acting as Licensor to a foreign company
3. Establishing JV outside the home country with
   foreign companies
4. Establishing wholly owned business outside the
   home country.

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Managerial Issues on Production and Sourcing

• From where should the firm supply the target
  market?
• To what extent should the firm itself undertake
  production?
• To the extent that it does not, what and where
  should it buy from others?
• To the extent that a firm opts to do at least
  some manufacturing, how should it acquire
  facilities.
• Should the firm produce in one plant or many,
  related or autonomous?
• What sort of technology should it use?
• What site is best?
• Where should research and development be located?
  

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Licensing-Issues

• Types of firms that license-out
• Predominant industries involved
• Revenues generated
• Countries they license to
• Costs of negotiating administering license
  agreements
• Common terms in their license agreements
• Areas in which there is most disagreement

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For Licensor

• Licensing is a chance to exploit its technology
  in markets that are too small to justify larger
  investments or in market that restrict imports or
  FDI.
• Means of testing and developing a market.
• For Licensee
• Permits the acquisition of technology more
  cheaply than by internal development.
• Allows a firm to acquire a technology that, when
  combined with other skills already present,
  permits it to diversify.

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• Managerial Issues
• For Licensor Risks of losing a technological
  advantage, reputation and potential profits.
• For the Licensee Risks that the technology will
  not work as expected or will cost more to
  implement than anticipated.

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Management of International JVs

• Why the particular market is being chosen?
• Why the investment is occurring?
• Whether now is the appropriate time?

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Management of International JVs
NEED

• To combine complementary skills from different
  organizations.
• To assure or speed market access.
• To meet a technological gap.
• To strategically respond to more intense
  competition.

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Managerial Issues

• Whether it is equity-based?
• Length of the agreement.
• Whether a whole range of resources and right
  transferred?
• Method of resource transfer.
• Typical compensation method.

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Global Manager-Challenges

• Ability to develop and use global strategic
  skills.
• Manage change and transition.
• Manage cultural diversity.
• Design and function in flexible organization
  structures.
• Work with others and in teams.
• Communicate, learn and transfer knowledge in an
  or organization.

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Effects of Globalization on the World Economy

• The Global economy is becoming come integrated
  day by day.
• Volume of World trade (4.0 ) has grown at a
  faster rate than volume of World output (1.5 ).
• Trend of lowering the barriers to the free flow
  of goods, services and capital among countries.
• FDI has been playing a crucial role in the global
  economy.

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• Imports are penetrating deeper into the worlds
  largest economies as well.
• Growth of world trade, FDI and imports lead to
  more foreign competition in the domestic markets.
• Domestic firms are required to enhance the
  production distribution capabilities to compete
  with foreign players.
• Companies have started looking the world as a
  market for their products.
• Innovations have started spreading faster.

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• Opportunities have been increasing for the firms.
• Companies have started dispersing their
  manufacturing, marketing and research facilities
  around the globe where cost and skill conditions
  are most favorable.