4.

2 International Business
Ashish J. Shah profajshah-bnsb@yahoo.com 9740098952 2009 11

Course Brief
Learning Methodology:
Interactive lectures Case studies Other Class work - individual and group, Home work individual and group Assignments

Course Agenda
1. 2. 3. 4. 5. Introduction to International Business International Business Environment Global Business Strategic Management Exim Trade Control & Evaluation of International Business 6. Conflict in International Business and Negotiations
3

Assessment
Total = 25 marks
Attendance: 5 marks
75-79%: 1 marks 80-84%: 2 marks 85-89%: 3 marks 90-94%: 4 marks +95%: 5 marks

Tests: 2 x 5 marks = 10 marks Individual Presentation (5 10 mins.): 10 marks

MPBIM - MBA, Entrepreneurship and New Venture Creation, Ashish J Shah

Module 1 Agenda
Introduction to International Business:
Definition Trade and Investment Flow Theories of International Trade Economic Theories Forms of International Business

International Business
History:
Greece, China: sent merchants to foreign lands (BC) 1300 1500 AD: Black Death in Europe 1600s: conquests by colonial powers 1700s 1800s: age of mercantilism 1900s beginning of the golden era of international trade

Scope of International Business www.peaceworks.com

Scope of International Business

www.peaceworks.com

Daniel Lubetzky Social and commercial entrepreneur not-only-for-profit enterprise Profit with a Conscience: CAN BUSINESS BE "GOOD"? Started with the aim of bringing peace between Arabs and Israelis Theory of Economic Cooperation Targets in-conflict parts of the world amongst others: Africa, Middle East Range of cuisines and food segments catered to Ingredients sourced by multicultural teams from various parts of the world
8

Scope of International Business www.peaceworks.com

Key impacts of PeaceWorks business model:
Commercial Cooperation across value network Regional Participation Human Interaction

And this results in:

Job Creation and Export-led Growth Employment & Technology Peace Building
9

International Business?

Van Der Waals Forces!

10

Scope of International Business

What is Business?
An action (s) between/among a party (s) that results in an exchange of value.

What is International Business?

Transactions across international boundaries. activities designed to direct flow of a company's goods and services to consumers or users in more than one nation for a profit (attempt a definition of your own)

Difference between domestic and international business?

Not just in the concept, but also in the environment in which business must be conducted.

11

Overview of Global Business and Economy

China (11 %), India (8.5 %), US (4.5 %) fastest growing economies However, US trade deficit @ 6 % of GDP weak dollar good for US, bad for rest of world Globalisation:
Hyundai i10, Suzuki - Alto, iPad, Windows Two way channel for participating countries Reforms in India aimed at aligning Indian economy with global ones
12

Overview of Global Business and Economy

Indian firms investing more than US $ 10 billion each year overseas Global companies (IBM) moved upto 2 million BPO jobs alone to India Globalisation:
highlights threats to companies with local market orientation creates jobs and opportunities where none is an expensive and complex process Internationalisation, Competitiveness (FDI in 2004 China ($ 44.2 bn), India ($ 3.4 bn))

Indian govt. Aiming at creating 8 10 million jobs each year and maintain 8 % growth
13

Overview of Global Business and Economy

World Economies (2004)
US:
Attracted max. FDI and grew by 4.4 % Has high trade deficit expected to cross 40 % of its economy and financed by Asian banks Chinese economy expected to slow down as a result and this impact on world economy

Europe (2004)
Grew by 2.1 % Investment growth negative and consumption flat UK managed to avoid recession impact till 2005

14

Overview of Global Business and Economy

Japan (2004)
2.6 % growth after a decade of stagnation. But, after the quake last week?

China (2004)
9.5 % growth Explosive growth in industry may lead to frequent boomand-bust cycles due to overcapacities in China

India (2004)
7 % growth Fourth best buying power Many corporates now part of the $ billion club Economic outlook marred due to geopolitical tensions with neighbours
15

Scope of International Business

Internationalisation of Businesses JLR-TATA, Arcelor-Mittal, Daimler-Chrysler, MTR-Orkla
Micro environment price, product, promotion, channels Macro environment (domestic) - PESTLED Macro environment in country A PESTLED Macro environment in country B PESTLED

16

Scope of International Business

Need for International Business Characteristics of International Business Importance of International Business Approaches of International Business
Ethnocentric Polycentric Regiocentric Geocentric
17

Scope of International Business

International Business Decisions
The International Business Decision Market Selection Decision Entry and Operating Decision Marketing Mix Decision Marketing Organisation Decision License Export via Agent or Distributor Export through own sales rep or sales subsidiary Local packaging and assembly FDI
18

Internationalisation Process

Scope of International Business

Driving Forces of International Business
Economies of Scale Meet Demands and Expectations of Markets Culture Leverage Experience Technology Resource utilisation Strategic vision Competition and costs Economic growth Quality improvement Economic integration and free markets Living standards Emergence of WTO Role of MNC / MNE

19

Scope of International Business

Restraining Forces of International Business
Culture Market competition in host country Costs National controls Nationalisation War and Terrorism Short-sightedness of management Organisational history Domestic forces Conflict with companies and within international organisation Lack of home country support

20

Scope of International Business

Aspects of the Domestic Environment:
PESTLED (international) - generally uncontrollable factors both at home and in target countries have +ve & -ve impact
+ve: US gives PNTR (Permanent Normal Trade Relations) status to China (Boeing & Motorola) and lifts Apartheid sanctions on SA -ve: US sanctions on Iran, Iraq, Libya, South Africa impacts IBM, Exxon

PESTLED (domestic)
US goods faced low exports because of a strong US Dollar in the 80s. This changed in the 90s. Rajiv Gandhi and Manmohan Singh brought in economic reforms and opening up of the Indian economy

Local competition Kodak hit by Fuji Film entry

21

Scope of International Business

Aspects of the Foreign Environment
Analyses involves PESTLED shocks Dynamic changes complicate PESTLED issues further e.g. China s dynamic legal system and Coca Cola Industrial practice gaps amongst developed, developing and under-developed worlds to be factored e.g. understanding of the concept of preventive maintenance of machines Alien status of a business in the foreign country complicates matters e.g. Coca Cola in India asked to reveal formula or leave; returned to be troubled again by PESTLED factors Political bias: tendency of domestic firms to receive favourable treatment from local governments than alien firms

22

Scope of International Business

Environmental Adaptation Needed
PESTLED (esp. culture) understanding and its impact a must for international business. Cultural understanding and adjustment most challenging for international businesses A modifiable frame of reference necessary as a culture platform to establish understanding and proceed e.g. white colour has different connotations in India and the west, hand gestures Cultural conditioning = iceberg (just 1/10th visible)
23

Theories of International Trade

Theory of Mercantilism
Measures wealth of a nation by the size of its treasures Aims at creating trade surplus to increase treasury and build a powerful army and infrastructure e.g. USA, UK engaged in many wars for the past century Limitations:
Win-lose partnership where other trading partners are exploited No contribution to global wealth Restrictive trade policies ensure subsidised production and exports but limit imports to protect local industry. This creates highly restrictive trade practices around the world Vast price disparity between purchase price of raw material and selling price of finished goods
24

Theories of International Trade

Theory of Absolute Advantage
Adam Smith An Inquiry into the Nature and Causes of the Wealth of Nations wealth is in per capita and quality of living and not in physical treasures alone Absolute Advantage: ability of a nation to produce a good more efficiently and cost-effectively than any other nation; therefore specialisation e.g. China. Advantages could be:
Natural: climate, geography e.g. India Acquired Advantage: e.g. Industrial production capability-> auto parts for Audi made in India, gem stone processing in Jaipur, Surat, Navasari, Mumbai

25

Theories of International Trade

Theory of Comparative Advantage
Principles of Political Economy and Taxation, David Ricardo A country benefits from international trade even if it is unable to produce more than one good more efficiently than other countries by focusing on the good(s) that it can most efficiently manufacture and doing away with the goods it is less efficient at manufacturing, thus gaining absolute advantage in the manufacture of one good rather than two or more goods. E.g. Germany and solar tech
26

Theories of International Trade

Limitations: Countries have other priorities and focus areas; hence focus on achieving efficiency in one area of operation may be difficult to achieve e.g. Gulf countries are oil traders, but have focused extensively in becoming self-reliant in agriculture Overall efficiency is better achieved when multiple products vis--vis a single product are manufactured as resources are better utilised Assumption that labour is the only resource used in production is invalid. Other resources are required too
27

Theories of International Trade

Division of gains is often unequal amongst trading partners leading to alienation of partners getting lower returns Theory stands good for more than two countries participating and not alone for two countries as proposed in theory Logistics costs are ignored in theory for international trade Economic production quantities (EPQ) and production pattern has not been discussed
28

Theories of International Trade

Factor Endowment Theory
Heckscher and Ohlin discussed type of products in which countries can have an advantage, otherwise not discussed by earlier theories e.g. bamboo, jute from India, Bangladesh Nations will export products that can be manufactured using the abundant and cheap resources possessed by it and will import those products otherwise requiring the use of its scarce and expensive resources e.g. Kazakhstan and Uranium
29

Theories of International Trade

Factor Endowment Theory suggests three types of relationships:
Land-Labour Relationship - country would specialise in production of labour-intensive goods as labour is cheap relative to the cost of land e.g. India Labour-Capital Relationship where labour is expensive and capital available, countries would specialise in the production of capital-intensive goods than labour-intensive goods e.g. ICs, defence equipment (EU) Technological Complexities products produced using different technologies have different cost competitiveness; optimum use of technology is made to mitigate higher production costs e.g. evolution of solar PV panels
30

Theories of International Trade

Summary:
countries with cheap labour will produce and export labour-intensive goods while those with access to capital but impacted by high labour costs will produce and export capital-intensive goods

31

Theories of International Trade

Theory of the International Product Life Cycle
Depends on the market size of the country A large market e.g. USA, India, China ensures a large domestic production base to achieve cost efficiency and enables international competitiveness through economies of scale Smaller countries outsource/offshore their requirements and are competitive by economies of scope through expansion into international markets e.g. UK However, globalisation has rendered this theory less tenable where products are globally launched and managed simultaneously e.g. USA and Germany
32

Theories of International Trade

Theory of Competitive Advantage
Porter s The Competitive Advantage of Nations Porter s Diamond theory of competitive advantage advocates the home-country as being the source of competencies and innovations Model helps understand the comparative position of a nation amongst other competitive nations

33

Theories of International Trade

Porter argues that native factors and resources not necessarily only/main source of competitive advantage Instead, proposes a cluster concept e.g. Silicon Valley and that competitive advantage is a result of a complex network of suppliers, manufacturers and industries competitive advantage is an outcome of four interlinked factors
34

Theories of International Trade

35

Theories of International Trade

Porter s Diamond
Firm Strategy, Structure and Rivalry: Competition in the market pushes firms to improve productivity and remain innovative Factor (Input) Conditions: key and non key factors skilled labour (specialised) and unskilled labour (non key). Key factors are not inherited, but created Demand Conditions: demand in domestic market and share of power between buyers and sellers i.e. sellers or buyers market? Demand pressure from buyers will determine the extent to which a firm will/will not be innovative to maintain demand levels
36

Theories of International Trade

Related and Supporting Industries: support base for production companies can improve the productivity and innovation of firms e.g. JIT for auto firms Chance: factors beyond control of firms, industry and governments e.g. currency fluctuations, international trade agreements Government: policies, laws, assistance, catalyst to firms. Will not only assist firms but will also challenge their way of working to maintain competition in the market. May introduce barriers or create new avenues for firms.
37

Economic Theories
Monopolistic Advantage Theory
Stems from Stephen Hymer s dissertation in the 60s Showed FDI occurs more in oligopolistic industries rather than those with near-perfect competition Incoming companies into new markets therefore need to overcome knowledge gaps of the target market Advantages that MNCs must create are:
Superior tech Superior marketing, management and finance knowledge

38

Economic Theories
Product and Factor Market Imperfections
Caves (Harvard economist) expanded on Hymer s work Showed superior knowledge permitted MNCs to produce differentiated products that prompted consumers to choose MNC products to local products, thus giving advantage to MNCs over local firms Noticed that MNCs investing overseas were generally engaged heavily in R & D and marketing
39

Economic Theories
Financial Factors
Aliber imperfections in forex market may be responsible for foreign investment Companies with overvalued currencies attracted to invest in countries with undervalued ones Portfolio Theory: suggests that international operations allow for a diversification of risk and hence tend to maximise expected ROI

40

Economic Theories
International PLC
FDI is a natural stage in the life of a product Company often forced to invest overseas in production facilities to avoid losing competitive advantage in those markets This move is heightened during third and fourth stages of the IPLC

41

Economic Theories
Follow the Leader
Knickerbocker When one firm, especially the leader in an oligopolistic industry, enters a market, others follow This theory considered defensive and reactive as firms feel insecure about losing market share to new investor in their export markets Also, a feeling of better safe than sorry
42

Economic Theories
Cross Investment
Suggests that an investment by one company from a region in another region is reciprocated by the host country into the investing country e.g. US opens subsidiaries in the EU and vice versa and the philosophy is that any offensive moves by either competitor outside their home markets can be counteracted by equivalent moves by the other competitor
43

Economic Theories
Internationalisation Theory
Extension of the market imperfection theory A firm may have superior knowledge, but due to inefficiencies in external markets, may extract a higher price for the knowledge by utilising the knowledge itself in developing products instead of selling the knowledge Firms thus able to realise superior return on investment, particularly as this knowledge is also embedded in products made and sold by company
44

Economic Theories
Dynamic Capabilities
Linked to RBV of a firm Ownership of specific knowledge necessary, but not enough for success in int l markets Firm must be able to effectively create and exploit dynamic capabilities for quality and/or quantity deployment, which must be transferable to international environments Companies typically develop centres of excellence to develop DCs to be applied to future investments
45

Economic Theories
Dunning s Eclectic Theory of International Production (OLI model)
Attempts to explain why firms prefer FDI to other modes of entry such as exports, licensing, JVs, strategic alliances A firm investing overseas must have 3 advantages:
Ownership-specific advantages Location-specific advantages Internationalisation
46

Economic Theories
Observation from theories:
Major FDI made by large, research-intensive firms in oligopolistic industries

47

Forms of International Business

Exports Channel partners exim partners, agents, marketers, stockists, distributors Outsourcing Offshoring JVs, strategic alliances, hostile takeovers, buyout FDI
48