BA9209 INTERNATIONAL BUSINESS MANAGEMENT

UNIT I INTRODUCTION

International Business Definition

Today, business is acknowledged to be international and there is a general expectation that this will continue for the foreseeable future. International #usiness *a( #e 'efine' si*+l( as #usiness transa%tions t!at ta,e +la%e a%ross national #or'ers) T!is #roa' 'efinition in%lu'es t!e -er( s*all fir* t!at e.+orts /or i*+orts0 a s*all 1uantit( to onl( one %ountr(2 as 3ell as t!e -er( lar&e &lo#al fir* 3it! inte&rate' o+erations an' strate&i% allian%es aroun' t!e 3orl') Within this broad array, distinctions are often made among different types of international firms, and these distinctions are helpful in understanding a firm s strategy, organi!ation, and functional decisions "for example, its financial, administrative,

.k

in i

International #usiness $ Business transa%tions %rossin& national #or'ers at an( sta&e of t!e transa%tion)

nd

ia

Dealing with so many different cultures and with extensive field experience, I tend to apply the simplest of definitions:

.c o

!at Is International Business"

marketing, human resource, or operations decisions# $ne distinction that can be helpful is the distinction between multi%domestic operations, with independent subsidiaries which act essentially as domestic firms, and global operations, with integrated subsidiaries which are closely related and interconnected. These may be thought of as the two ends of a continuum, with many possibilities in between. &irms are unlikely to be at one end of the continuum, though, as they often combining aspects of multi%domestic operations with aspects of global operations. International business grew over the last half of the twentieth century partly because of liberali!ation of both trade and investment, and partly because doing business internationally had become easier. In terms of liberali!ation, the 'eneral (greement on Tariffs and Trade "'(TT# negotiation rounds resulted in trade liberali!ation, and this was continued with the formation of the World Trade $rgani!ation "WT$# in )**+. (t the same time, worldwide capital movements were liberali!ed by most governments, particularly with the advent of electronic funds transfers. In addition, the introduction of a new ,uropean monetary unit, the euro, into circulation in -anuary .//. has impacted international business economically. The euro is the currency of the ,uropean 0nion, membership in 1arch .//+ of .+ countries, and the euro replaced each country s previous currency. (s of early .//+, the 0nited 2tates dollar continues to struggle against the euro and the impacts are being felt across industries worldwide. In terms of ease of doing business internationally, two ma3or forces are important: ). technological developments which make global communication and transportation relatively 4uick and convenient5 and .. the disappearance of a substantial part of the communist world, opening many of the world s economies to private business.

DOMESTIC 4S) INTERNATIONAL BUSINESS

Domestic and international enterprises, in both the public and private sectors, share the business ob3ectives of functioning successfully to continue operations. 6rivate enterprises seek to function profitably as well. Why, then, is international business different from domestic7 The answer lies in the differences across borders. 8ation%states generally have uni4ue government systems,

w .k

in

in

di a

.c

om

laws and regulations, currencies, taxes and duties, and so on, as well as different cultures and practices. (n individual traveling from his home country to a foreign country needs to have the proper documents, to carry foreign currency, to be able to communicate in the foreign country, to be dressed appropriately, and so on. Doing business in a foreign country involves similar issues and is thus more complex than doing business at home. The following sections will explore some of these issues. 2pecifically, comparative advantage is introduced, the international business environment is explored, and forms of international entry are outlined.

T5EORIES O6 INTERNATIONAL TRADE AND IN4ESTMENT

In order to understand international business, it is necessary to have a broad conceptual understanding of why trade and investment across national borders take place. Trade and investment can be examined in terms of the comparative advantage of nations. 9omparative advantage suggests that each nation is relatively good at producing certain products or services. This comparative advantage is based on the nation s abundant factors of production: land, labor, and capital:and a country will export those products;services that use its abundant factors of production intensively. 2imply, consider only two factors of production, labor and capital, and two countries, < and =. If country < has a relative abundance of labor and country = a relative abundance of capital, country < should export products;services that use labor intensively, country = should export products;services that use capital intensively. This is a very simplistic explanation, of course. There are many more factors of production, of varying 4ualities, and there are many additional influences on trade such as government regulations. 8evertheless, it is a starting point for understanding what nations are likely to export or import. The concept of comparative advantage can also help explain investment flows. 'enerally, capital is the most mobile of the factors of production and can move relatively easily from one country to another. $ther factors of production, such as land and labor, either do not move or are less mobile. The result is that where capital is available in one country it may be used to invest in other countries to take advantage of their abundant land or labor. &irms may develop expertise and firm specific advantages based initially on abundant resources at home, but as resource needs change, the stage of the product life cycle matures, and home markets become saturated, these firms find it advantageous to invest internationally.

w .k

in

in

di a

.c

om

T5E INTERNATIONAL BUSINESS EN4IRONMENT

International business is different from domestic business because the environment changes when a firm crosses international borders. Typically, a firm understands its domestic environment 4uite well, but is less familiar with the environment in other countries and must invest more time and resources into understanding the new environment. The following considers some of the important aspects of the environment that change internationally. The economic environment can be very different from one nation to another. 9ountries are often divided into three main categories: the more developed or industriali!ed, the less developed or third world, and the newly industriali!ing or emerging economies. Within each category there are ma3or variations, but overall the more developed countries are the rich countries, the less developed the poor ones, and the newly industriali!ing "those moving from poorer to richer#. These distinctions are usually made on the basis of gross domestic product per capita "'D6;capita#. >etter education, infrastructure, and technology, health care, and so on are also often associated with higher levels of economic development. In addition to level of economic development, countries can be classified as free%market, centrally planned, or mixed. &ree%market economies are those where government intervenes minimally in business activities, and market forces of supply and demand are allowed to determine production and prices. 9entrally planned economies are those where the government determines production and prices based on forecasts of demand and desired levels of supply. 1ixed economies are those where some activities are left to market forces and some, for national and individual welfare reasons, are government controlled. In the late twentieth century there has been a substantial move to free%market economies, but the 6eople s ?epublic of 9hina, the world s most populous country, along with a few others, remained largely centrally planned economies, and most countries maintain some government control of business activities. 9learly the level of economic activity combined with education, infrastructure, and so on, as well as the degree of government control of the economy, affect virtually all facets of doing business, and a firm needs to understand this environment if it is to operate successfully internationally.

w .k

in

in

di a

.c

om

The political environment refers to the type of government, the government relationship with business, and the political risk in a country. Doing business internationally thus implies dealing with different types of governments, relationships, and levels of risk. There are many different types of political systems, for example, multi%party democracies, one%party states, constitutional monarchies, dictatorships "military and nonmilitary#. (lso, governments change in different ways, for example, by regular elections, occasional elections, death, coups, war. 'overnment%business relationships also differ from country to country. >usiness may be viewed positively as the engine of growth, it may be viewed negatively as the exploiter of the workers, or somewhere in between as providing both benefits and drawbacks. 2pecific government%business relationships can also vary from positive to negative depending on the type of business operations involved and the relationship between the people of the host country and the people of the home country. To be effective in a foreign location an international firm relies on the goodwill of the foreign government and needs to have a good understanding of all of these aspects of the political environment. ( particular concern of international firms is the degree of political risk in a foreign location. 6olitical risk refers to the likelihood of government activity that has unwanted conse4uences for the firm. These conse4uences can be dramatic as in forced divestment, where a government re4uires the firm give up its assets, or more moderate, as in unwelcome regulations or interference in operations. In any case the risk occurs because of uncertainty about the likelihood of government activity occurring. 'enerally, risk is associated with instability and a country is thus seen as more risky if the government is likely to change unexpectedly, if there is social unrest, if there are riots, revolutions, war, terrorism, and so on. &irms naturally prefer countries that are stable and that present little political risk, but the returns need to be weighed against the risks, and firms often do business in countries where the risk is relatively high. In these situations, firms seek to manage the perceived risk through insurance, ownership and management choices, supply and market control, financing arrangements, and so on. In addition, the degree of political risk is not solely a function of the country, but depends on the company and its activities as well:a risky country for one company may be relatively safe for another. The cultural environment is one of the critical components of the international business environment and one of the most difficult to understand. This is because the cultural environment is essentially unseen5 it has been described as a shared, commonly held body of

w .k

in

in

di a

.c

om

general beliefs and values that determine what is right for one group, according to @luckhohn and 2trodtbeck. 8ational culture is described as the body of general beliefs and values that are shared by a nation. >eliefs and values are generally seen as formed by factors such as history, language, religion, geographic location, government, and education5 thus firms begin a cultural analysis by seeking to understand these factors. &irms want to understand what beliefs and values they may find in countries where they do business, and a number of models of cultural values have been proposed by scholars. The most well%known is that developed by Aofstede in)*B/. This model proposes four dimensions of cultural values including individualism, uncertainty avoidance, power distance and masculinity. Individualism is the degree to which a nation values and encourages individual action and decision making. 0ncertainty avoidance is the degree to which a nation is willing to accept and deal with uncertainty. 6ower distance is the degree to which a national accepts and sanctions differences in power. (nd masculinity is the degree to which a nation accepts traditional male values or traditional female values. This model of cultural values has been used extensively because it provides data for a wide array of countries. 1any academics and managers found this model helpful in exploring management approaches that would be appropriate in different cultures. &or example, in a nation that is high on individualism one expects individual goals, individual tasks, and individual reward systems to be effective, whereas the reverse would be the case in a nation that is low on individualism. While this model is popular, there have been many attempts to develop more complex and inclusive models of culture. The competitive environment can also change from country to country. This is partly because of the economic, political, and cultural environments5 these environmental factors help determine the type and degree of competition that exists in a given country. 9ompetition can come from a variety of sources. It can be public or private sector, come from large or small organi!ations, be domestic or global, and stem from traditional or new competitors. &or the domestic firm the most likely sources of competition may be well understood. The same is not the case when one moves to compete in a new environment. &or example, in the )**/s in the 0nited 2tates most business was privately owned and competition was among private sector companies, while in the 6eople s ?epublic of 9hina "6?9# businesses were owned by the state. Thus, a 0.2. company in the 6?9 could find itself competing with organi!ations owned by state entities such as the 6?9 army. This could change the nature of competition dramatically.

w .k

in

in

di a

.c

om

The nature of competition can also change from place to place as the following illustrate: competition may be encouraged and accepted or discouraged in favor of cooperation5 relations between buyers and sellers may be friendly or hostile5 barriers to entry and exit may be low or high5 regulations may permit or prohibit certain activities. To be effective internationally, firms need to understand these competitive issues and assess their impact. (n important aspect of the competitive environment is the level, and acceptance, of technological innovation in different countries. The last decades of the twentieth century saw ma3or advances in technology, and this is continuing in the twenty%first century. Technology often is seen as giving firms a competitive advantage5 hence, firms compete for access to the newest in technology, and international firms transfer technology to be globally competitive. It is easier than ever for even small businesses to have a global presence thanks to the internet, which greatly expands their exposure, their market, and their potential customer base. &or economic, political, and cultural reasons, some countries are more accepting of technological innovations, others less accepting.

INTERNATIONAL ENTR7 C5OICES

,xporting is often the first international choice for firms, and many firms rely substantially on exports throughout their history. ,xports are seen as relatively simple because the firm is relying on domestic production, can use a variety of intermediaries to assist in the process, and expects its foreign customers to deal with the marketing and sales issues. 1any firms begin by exporting reactively5 then become proactive when they reali!e the potential benefits of addressing a market that is much larger than the domestic one. ,ffective exporting re4uires attention to detail if the process is to be successful5 for example, the exporter needs to decide if and when to use different intermediaries, select an appropriate transportation method, preparing export documentation, prepare the product, arrange acceptable payment terms, and so on. 1ost importantly, the exporter usually leaves marketing and sales to the foreign customers, and these may not receive the same attention as if the firm itself under%took these activities. Carger exporters often undertake their own marketing and establish sales subsidiaries in important foreign markets.

w .k

International firms may choose to do business in a variety of ways. 2ome of the most common include exports, licenses, contracts and turnkey operations, franchises, 3oint ventures, wholly owned subsidiaries, and strategic alliances.

in

in

di a

.c

om

Turnkey contracts are a specific kind of contract where a firm constructs a facility, starts operations, trains local personnel, then transfers the facility "turns over the keys# to the foreign owner. These contracts are usually for very large infrastructure pro3ects, such as dams, railways, and airports, and involve substantial financing5 thus they are often financed by international financial institutions such as the World >ank. 9ompanies that speciali!e in these pro3ects can be very profitable, but they re4uire speciali!ed expertise. &urther, the investment in obtaining these pro3ects is very high, so only a relatively small number of large firms are involved in these pro3ects, and often they involve a syndicate or collaboration of firms.

9ontracts are used fre4uently by firms that provide speciali!ed services, such as management, technical knowledge, engineering, information technology, education, and so on, in a foreign location for a specified time period and fee. 9ontracts are attractive for firms that have talents not being fully utili!ed at home and in demand in foreign locations. They are relatively short%term, allowing for flexibility, and the fee is usually fixed so that revenues are known in advance. The ma3or drawback is their short%term nature, which means that the contracting firm needs to develop new business constantly and negotiate new contracts. This negotiation is time consuming, costly, and re4uires skill at cross%cultural negotiations. ?evenues are likely to be uneven and the firm must be able to weather periods when no new contracts materiali!e.

w .k

in

in

di a

.c

Cicenses are granted from a licensor to a licensee for the rights to some intangible property "e.g. patents, processes, copyrights, trademarks# for agreed on compensation "a royalty payment#. 1any companies feel that production in a foreign country is desirable but they do not want to undertake this production themselves. In this situation the firm can grant a license to a foreign firm to undertake the production. The licensing agreement gives access to foreign markets through foreign production without the necessity of investing in the foreign location. This is particularly attractive for a company that does not have the financial or managerial capacity to invest and undertake foreign production. The ma3or disadvantage to a licensing agreement is the dependence on the foreign producer for 4uality, efficiency, and promotion of the product:if the licensee is not effective this reflects on the licensor. In addition, the licensor risks losing some of its technology and creating a potential competitor. This means the licensor should choose a licensee carefully to be sure the licensee will perform at an acceptable level and is trustworthy. The agreement is important to both parties and should ensure that both parties benefit e4uitably.

om

2imilar to licensing agreements, franchises involve the sale of the right to operate a complete business operation. Well%known examples include independently owned fast%food restaurants like 1cDonald s and 6i!!a Aut. ( successful franchise re4uires control over something that others are willing to pay for, such as a name, set of products, or a way of doing things, and the availability of willing and able franchisees. &inding franchisees and maintaining control over franchisable assets in foreign countries can be difficult5 to be successful at international franchising firms need to ensure they can accomplish both of these. -oint ventures involve shared ownership in a subsidiary company. ( 3oint venture allows a firm to take an investment position in a foreign location without taking on the complete responsibility for the foreign investment. -oint ventures can take many forms. &or example, there can be two partners or more, partners can share e4ually or have varying stakes, partners can come from the private sector or the public, partners can be silent or active, partners can be local or international. The decisions on what to share, how much to share, with whom to share, and how long to share are all important to the success of a 3oint venture. -oint ventures have been likened to marriages, with the suggestion that the choice of partner is critically important. 1any 3oint ventures fail because partners have not agreed on their ob3ectives and find it difficult to work out conflicts. -oint ventures provide an effective international entry when partners are complementary, but firms need to be thorough in their preparation for a 3oint venture. Wholly%owned subsidiaries involve the establishment of businesses in foreign locations which are owned entirely by the investing firm. This entry choice puts the investor parent in full control of operations but also re4uires the ability to provide the needed capital and management, and to take on all of the risk. Where control is important and the firm is capable of the investment, it is often the preferred choice. $ther firms feel the need for local input from local partners, or speciali!ed input from international partners, and opt for 3oint ventures or strategic alliances, even where they are financially capable of )// percent ownership. 2trategic alliances are arrangements among companies to cooperate for strategic purposes. Cicenses and 3oint ventures are forms of strategic alliances, but are often differentiated from them. 2trategic alliances can involve no 3oint ownership or specific license agreement, but rather two companies working together to develop a synergy. -oint advertising programs are a form of strategic alliance, as are 3oint research and development programs. 2trategic alliances seem to make

w .k

in

in

di a

.c

om

some firms vulnerable to loss of competitive advantage, especially where small firms ally with larger firms. In spite of this, many smaller firms find strategic alliances allow them to enter the international arena when they could not do so alone. International business grew substantially in the second half of the twentieth century, and this growth is likely to continue. The international environment is complex and it is very important for firms to understand this environment and make effective choices in this complex environment. The previous discussion introduced the concept of comparative advantage, explored some of the important aspects of the international business environment, and outlined the ma3or international entry choices available to firms. The topic of international business is itself complex, and this short discussion serves only to introduce a few ideas on international business issues.

(lthough Internationali!ation provides all the above mentioned advantages, these advantages themselves bring in certain problems that constraint the ability of a firm to fully reap its benefits. &or example, a company might have successfully developed a product for the domestic market, and believes that there is a large consumer base for the product across the globe. ,ven though the product may have a large consumer base, the tastes and preferences of consumers may vary across nations to force the company to customi!e its product in order to be successful. Differentiation of products would lead to cost escalation, and result in erosion of profit margins. 2ince locali!ation leads to higher costs, companies wishing to internationali!e with a generic or a commodity product would be at a significant disadvantage. (nother problem arising out of internationali!ation is the use of location economies to maximi!e production element of global value chain. India along with 9hina may seem like an ideal location for placing production part of the value chain, but there are some caveats with these choices as well. India for example has a vast labor pool and low costs, but its archaic labor laws, excessive bureaucracy, and indifferent government makes it a poor choice. Internationali!ation can also lead to head4uarters and subsidiary conflict. ( Aead4uarters with a fully centrali!ed decision making process would allow for a

w .k

in

in

Internationali!ation can provide firms numerous benefits, including the ability to sell to a larger market, utili!ation of location economies, using experiences learned in various markets to enhance core competencies, and development and transfer of skills between subsidiaries and head4uarters.

di a

.c

Internationali8in& #usiness9A'-anta&es

om

streamlined and coordinated decision making process, but at the same time would also inhibit subsidiaries from innovating and taking risks which could have benefitted the corporation. ( decentrali!ed decision making on the other hand would allow subsidiaries to respond 4uickly to the needs of their local market, but at same time could also lead to lack of coordination among various parts of value chain, and might even cause subsidiaries to carry out activities that might run counter to the benefit of the firm as a whole. It can be stated that 6rocter D 'amble historically followed a Elocali!ationE strategy while internationali!ing. (s stated by its first vice%president of overseas operations Walter Cingle, EWe must tailor our products to meet consumer demands in each nation.E 2uch customi!ation and country%specific divisions meant that the company would have numerous subsidiaries, which would also end up duplicating numerous elements of the value chain process. (lthough the locali!ation strategy was successful in its earlier, a combination of events, including the fall of trade barriers in ,urope meant that the nature of the competitive market also changed making locali!ation strategy being pursued by 6rocter D 'amble prohibitively expensive for the firm. 2ince the structure and strategy of the company were inconsistent with the nature of the market, the company s 9,$ -ager introduce a vision that would align the company s strategy and structure with the new realities of the market. (long with alignment of strategy and structure, the vision % $rgani!ation .//+ "$.//+# would attempt to change the way the company innovated, produced, and marketed its products. The $rgani!ational .//+ vision could be described as the movement of the company from locali!ation strategy to transnational strategy. 2ince the implementation of vision $.//+ was a work in progress during the events of the case, I will discuss numerous measures that the company could have implemented to strengthen the vision. In case of 6rocter D 'amble, the process through which the 2@%II product was created can be described as an excellent path for the company to follow to maximi!e global value chain activities, and at the same time provide tailored products to individual markets. The 2@%II development process utili!ed globally standardi!ed EshellsE or EchassisE cleansing product that would allow for utili!ation of economies of scale and location economies. The creation of 2@%II product involved a global development process which was created once a consumer researcher found that despite regional differences, there was an opportunity worldwide for facial cleansing. ( technology team was assembled drawing personnel from various divisions of the company throughout the world. This technology team developed a new

w .k

in

in

di a

.c

om

facial cleansing product that would serve as a foundation for 6rocter D 'amble to customi!e and market in various nations. &or example, the -apanese team added attributes to the foundation or EchassisE product that would satisfy the needs of the -apanese consumers. The 0.2. developing team on the other hand added attributes to the EchassisE product that would meet the re4uirements of the (merican consumers. This development process essentially allowed the company to build ) globally standardi!ed product % the EchassisE, which utili!ed location and economies of scale to reduce costs, and at the same the time allowed for the differentiation of the product through addition of various attributes suitable to the local market. The adoption of this strategy throughout 6rocter D 'amble would allow the company to find a balance between locali!ation and standardi!ation. 2ince the competitive nature of the market changed, the prior organi!ational structure 6rocter D 'amble followed became a liability. ( new organi!ational structure would re4uire the company s strategy and organi!ational culture to be aligned with the demands of the new competitive market. The current organi!ational structure of 6rocter D 'amble revolved around the F regional organi!ations which were tasked with profit responsibility. 0nder vision $.//+, the profit responsibility shifted from regional organi!ations to global business units "'>0s#, who were also tasked with managing of product development, manufacturing, and marketing of their respective categories worldwide. 0nder this structure, the cosmetics business unit would be entirely responsible for profitability, manufacturing, and marketing of products under its unit worldwide. The product based divisional structure would streamline the decision making process, by placing decision making authority under those who are focused only on that product division, as opposed to a country a manager who has a broader scope. The problem with this organi!ational structure is that it reduces the role of national managers who could have provided the company the best input in terms of customi!ation of a product for the local market. $ne of the ways that 6rocter D 'amble could balance the problem is by involving country managers in the post%chassis development process. With the foundation EchassisE product on hand, the product division managers could involve country managers in providing input that would allow the EchassisE product to be adapted to the local needs. 6rocter D 'amble could also establish a knowledge network where informal contacts are encouraged and maintained throughout the company to allow free transmitting of ideas. &or example, a country manager may reali!e that there is a need that is not being satisfied by current products in the market. ( knowledge network or informal web of network may allow a country manager to get in touch with other relevant members in the organi!ation more

w .k

in

in

di a

.c

om

4uickly cutting through bureaucratic hurdles, and pave the way for a development process that would lead to creation of new products. (s has been stated in the case, 6rocter D 'amble had numerous issues in dealing with its various subsidiaries. $ne of the problems that arise during internationali!ation is the subsidiary%head4uarter conflict. 6rocter D 'amble has to balance between decentrali!ation that would lead to innovation and risk taking, and centrali!ation that would lead to greater coordination among various divisions of the firm. In order to ensure innovation, risk taking, efficient coordination, and buy%in by the various subsidiaries, 6rocter D 'amble could pro3ect its head4uarters as Efirst among e4ualsE, rather than the absolute authority in all decision making process. 2ince 2@%II was an endeavor of the -apanese division, 6rocter D 'amble would be well advised to reali!e that new product innovations don t have to come 3ust from the head4uarters, but could also come from other divisions. ,ncouraging initiatives like internationali!ation of 2@%II would also encourage greater organi!ational buy%in from other subsidiaries. 0pward mobili!ation of personnel throughout the firm rather than being restricted to one geographic region would also encourage the belief among subsidiaries that they are part of a larger EorganismE, rather than an isolated entity. ,ncouraging and nurturing informal networks across subsidiaries, and at the same time creating interdependence % whether in terms of production or ?DD process would allow the subsidiaries and employees to look at the best interests of the firm rather than their immediate division. 2ince the organi!ational culture, and culture of the nation the firm is located in affects the performance of the firm, 6rocter D 'amble would be well encouraged to recruit employees that are a EfitE to culture being encouraged by the firm. ( strong organi!ational culture would ensure that employees have a strong identity regarding the values, ideals, rituals, and goals of the firm. !at are t!e a'-anta&es an' 'isa'-anta&es of 'oin& #usiness internationall(" A'-anta&es Faster growth: &irms that have operate internationally tend to develop at a much 4uicker pace than those operating locally

w .k

in

in

di a

.c

om

Access to cheaper inputs: $perating internationally may enable the firm to source raw materials or labor at lower prices Increased quality and efficiency: ,xposure to foreign competition will encourage increased efficiency. Doing business in the international market allows firms to improve the 4uality of their product in order to gain a competitive advantage. New market opportunities: International business presents firms with new market opportunities. These new markets provide more opportunities for expansion, growth, and income. ( bigger market means more customers, increased revenue, a larger profit margin, and allows the business to reali!e economies of scale. Diversification: (s the firm diversifies its market, it becomes less vulnerable to changes in local demand. This reduces wild swings in a company s sales and profits.

Complex organizational structure: International business usually re4uires changes to the firms operating structure. Training;retraining of management may be necessary to facilitate restructuring.

6a%tors %ausin& Glo#ali8ation of #usiness

It means businesses are shifting their boundaries from domestic to international ones. The rapid growth of business globali!ation rises some 4uestions to research. $ne of them is why business is becoming global7 The main and important causes for the recent business globali!ation are: increase in global competition, rapid increase and

Delays in payments: International trade may cause delays in payments, adversely affecting the firm s cash flow.

w .k

Foreign regulations and standards: The firm may need to conform to new standards. This may re4uire changes such as in the production process, inputs and packaging, incurring additional costs.

in

Increased costs: There are increased operating expenses including the establishment of facilities abroad, the hiring of additional staff, traveling of personnel, speciali!ed transport networks, information and communication technology.

in

di a

Disa'-anta&es

.c

om

expansion of technology, liberali!ation of cross border movement and development of supporting services. The pressure of increased foreign competition can force a company to expand its business into international market. 8ow dayGs companies can respond rapidly to many foreign sales opportunities. They can exchange production 4uickly among countries if they are experienced in foreign market and because they can transport goods efficiently from one place to other. The pace of the technology advances has accelerated to greater heights and the knowledge of product and services is available more 4uickly and due to communication and transportation technology. >y increasing the demand of new products and services, Technology has tremendous impact on International business as the demand increases and so do the number of International business transactions. The World Trade $rgani!ations "WT$# in )**+ made some rules due to which the restrictions imposed on international trade are diminishing. >anks have developed efficient means for companies to receive payments for their foreign sales, some examples are Western union money transfer, different countries bank in one country. 1ost producers can be paid relatively easily for goods and services sold abroad because of financial facilities. The considerable number of facilities and services has grown up so 4uickly and are now developing and advancing their 4uality that business globali!ation will inevitably remain one of the most rapid and successful events in the twenty first century.

Definition: &lo#ali8ation is t!e tren' to3ar' a *ore inte&rate' &lo#al e%ono*i% s(ste*) The rate at which this shift is occurring has been accelerated recently. 'lobali!ation has two faces: 'lobali!ation of markets 'lobali!ation of production Glo#ali8ation of *ar,ets:

!at is &lo#ali8ation"

w .k

in

in

di a

.c

om

Glo#ali8ation of *ar,ets refers to t!e fa%t t!at in *an( in'ustries !istori%all( 'istin%t an' se+arate national *ar,ets are *er&in& into one !u&e &lo#al *ar,et+la%e) There is a movement towards a globali!ation of markets, as the tastes and preferences of consumers in different nations are beginning to converge upon some global norm. The global acceptance of 9oca% 9ola, CeviGs 3eans, 2ony Walkmans, and 1cDonaldGs hamburgers are all examples. >y offering a standard product worldwide, they are helping to create a global market. ,ven smaller companies can get the benefits from the globali!ation of markets. Despite the global prevalence of global brands such as Cevis, 9ity >ank, 6epsi etc, national markets are not disappearing. There are still significant differences % 'ermany still leads in per capita beer consumption, with a local pub on almost every corner and in some cities, women selling beer out of their front windows to passers by on the street. The &rench lead in wine consumption, and the consumption of wine is a natural part of life anywhere in &rance. Italians lead in pasta eaten, and these differences are unlikely to be eliminated any time soon. Aence, often there is still a need for marketing strategies and product features to be customi!ed to local conditions.

Through this companies hope to lower their overall cost structure and or improve the 4uality or functionality of their product, thereby allowing them to compete more effectively against their rivals. The examples of >oeing and 2wan $ptical illustrate how production is dispersed. >oeing 9ompanyGs commercial 3et airliner, >oeing HHH contains )I.,+// ma3or components parts that are produced around the world by +F+ different suppliers. ,ight -apanese suppliers make parts of fuselage, doors and wings, a supplier in 2ingapore make the doors for the nose landing gear, three suppliers in Italy manufacture wing flaps etc.

T!e &lo#ali8ation of +ro'u%tion refers to t!e ten'en%( a*on& *an( fir*s to sour%e &oo's an' ser-i%es fro* 'ifferent lo%ations aroun' t!e &lo#e in an atte*+t to ta,e a'-anta&e of national 'ifferen%es in t!e %ost an' 1ualit( of fa%tors of +ro'u%tion) /la#or2 ener&(2 lan' an' %a+ital0

w .k

in

Glo#ali8ation of +ro'u%tion:

in

di a

.c

om

The result of having a global web of suppliers is a #etter final +ro'u%t, which enhances the chances of >oeing wining a greater share of aircraft orders than its global rival Air#us. While part of the rationale is based on costs and finding the best suppliers in the world, there are also other factors. In >oeingGs case, if it wishes to sell airliners to countries like 9hina, these countries often demand that domestic firms be contracted to supply portions of the plane % otherwise they will find another supplier "(irbus# who is willing to support local industry. What are causes of globalisation7

w .k

in

"d# Caws allowing countries to invest and export to each other

in

Aowever, for globali!ation to work there needs to be:

di a

"c# ,ducation around the world skills workers to do the work previously limited to the developed world

.c

"b# 1ass transport allows people and goods also to cheaply travel faster and further

om

"a# Technology allows ideas to cheaply travel faster, further and to more people