chapter one

The Rapid Change of International Business

McGraw-Hill/Irwin International Business, 11/e

Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
• Appreciate the dramatic internationalization of markets • Understand the various names given to firms that have operations in more than one country

• Understand the five kinds of drivers, all based on change, that are leading international firms to globalize
• Comprehend why international business differs from domestic business • Describe the three environments—domestic, foreign, and international--in which an international firm operates


International Business Terminology

• • • • •

International business Foreign business Multidomestic company (MDC) Global company (GC) International company (IC)


International Business Terminology,

• International Business
– A business whose activities are carried out across national boarders

• Foreign Business
– The operations of a company outside its home or domestic market

• Multidomestic Company
– An organization with multicountry affiliates • Each formulates its own business strategy on perceived market differences

International Business Terminology,

• Global Company
– an organization that attempts to standardize and integrate operations worldwide in most of all functional areas

• International Company
– A global or multidomestic company


History of International Business
• Early traders
– Well before the time of Christ, Phoenician and Greek merchants – China stimulated the emergence of an internationally integrated trading system • ―all roads lead to China‖

• 17th Century mercantilism/colonialism
– British East India Company – Dutch East India Company – Portugal and France

• Globalization
– Coined by Theodore Levitt • ―as if the entire world (or major regions of it) were a single entity; [such an organization] sells the same things in the same way everywhere‖

• Economic Globalization
– International integration of goods, technology, information, labor, and capital – Process of making this integration happen

Table 1.1 Globalization Rankings: The KOF Index of Globalization and the A.T Kearney/Foreign Policy Globalization Index


Globalization Forces

• Political forces
– Reduction of barriers to trade and foreign investment by governments – Privatization of former communist nations

• Technological forces
– Advances in computers and communications technology – Internet and network computing

Globalization Forces, cont’d.
• Market forces
– Globalizing companies become global customers

• Cost forces
– Goal for economies of scale to reduce unit costs

• Competitive forces
– Increase in intensity due to explosive growth in international business


Explosive Growth
• Foreign Direct Investment and Exporting
– FDI - Direct investment in equipment, structures, and organizations in a foreign country • level sufficient to obtain significant management control (Table 1.2) – Exporting – transportation of any domestic good/service to a destination outside a country or region

Table 1.2 FDI Indicators and Multinational Company Statistics (billions of dollars and percentages)


Explosive Growth
• Number of International Companies
– UNCTAD - United Nations agency in charge of all matters relating to FDI and international corporations. • 1995 – 45,000 parent companies with 280,000 foreign affiliates ($7 trillion in sales) • 2004 – 70,000 parent companies with 690,000 foreign affiliates ($19 trillion in sales)

Table 1.3 Ranking of International Companies and nations according to GNI (Atlas Method) or Total Sales

Note: Belgium (B), China (PRC), France (F), Germany (G), Italy (It), Netherlands (N), Switzerland (S), United Kingdom (U.K.), and United States (U.S.). Source: World Development Indicators database, (July 4, 2006); and Fortune 2005 Global 500, (July 4, 2006).


Globalization Debate And You
• World Trade Organization (1999, Seattle)
– Extensive public protests about globalization and the liberalization of international trade

• Debate –
– Waged by diametrically opposed groups with extremely different views on consequences of globalization – Dramatic reductions in worldwide poverty are contrasted with anecdotal stories of people losing their livelihoods under the growing power of multinationals


Environments of International Business
• Environment
– All the forces influencing the life and development of the firm

• Forces
– External Forces (Uncontrollable) – Forces over which management has no direct control – Internal Forces (Controllable) – Forces that management can use to adapt to external forces

External Forces
• Competitive
– Kind, number, location

• Distributive
– For distributing goods and services

• Economic
– GNP, unit labor cost, personal consumption expenditure

• Socioeconomic
– Characteristics of human population

• Financial
– Interest rates, inflation rates, taxation

External Forces, cont’d.
• Legal
– Laws governing how international firms must operate

• Physical
– Topography, climate, and natural resources

• Political
– Forms of government, and international organizations

• Sociocultural
– Attitudes, beliefs, and opinions

• Labor
– Skills, attitudes of labor

• Technological
– Equipment and skills that affect how resources are converted to products

Internal Environmental Forces

• Factors of Production
– Capital, raw materials, and people

• Activities of the organization
– Personnel, finance, production, and marketing


Why Is International Business Different?
• Domestic Environment
– All the uncontrollable forces in the home country that surround and influence the firm’s life and development

• Foreign Environment
– All the uncontrollable forces originating outside the home country that surround and influence the firm • different values • difficult to assess • interrelated


Why Is International Business Different? cont’d.
• International Environment
– Interaction between domestic and foreign environmental forces or between sets of foreign environmental forces – Increased complexity for decision-making

• Decision making more complex

International Business Model


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