Foundation Concepts 1 Chapter Introduction: What Is International Business? Learning Objéctives Afier studying this chapter, you should be able to: 11 Describe the key concépi in international business. 12 Understand how international business differs from domestic business. 13 Identify major participants in international business. 14 Describe why firms internctionalize. 1S Appreciate why you should study infetnational business China Globalises London’s Black Cabs lobalisation ‘fers to intemational transactions, co- ‘operation, and compeition among firms. China has become one of the mos! active hading nations in an increasingly globalised world. China's pursuit in transforming itself into an industial economy gave birth to a thiving outer mobile industy and Geely Automobile Holdings Limited was, founded in 1986, Geely iso subsidiary of ti Shuf’s Zhejiang Geely Group. They began wih moloicycle production ond eventually stared manufacturing cars in 1997. Geelys moto of Happy ile, Geely Drive’ encompasses ils customers, sup pliets and human resource to manufacture safe, environmental friendly and god value automobiles. Releniless pursuit of bet ter technology, foreign brands ond oversees market resulled in Geelys European acquistion of Volvo cars in 2010 and london Taxi Company (UIC] in 2012 london Taxi Company is the manufacturer of the iconic london Black Cabs. Coventry has been the home of the company for las 70 years. Covenity city isthe bith place of Briish motor industy and has long kodtion of manufactsing iconic cutomobile brands like Jaguar, Rover, Triumph, and Armstiong Siddeley. The Fx4 mode! toxs rolled out in 1959 from Coventry plant set the quinlessentiol shape fer the black cobs. They formed partnesship with Geely in 2006 which f nally acquired the taxi moker in 2012 for £11.4 milion afer i ‘wen! inlo adriristaton. london Taxi Companys cutent anew prcduction is approximately 2000 tons. Geely has been core stony investing fo increase capacity and compattiveness since cccquistion, The company has recently onnounced a £250 millon investment to build a new factory wih a production copay of approximately 36000 cars anual. This news ire vestments celebrated locally and nationally due to 1000 new jobs creation and boos othe local economy. Geelys ambition to put iconic London taxis in all major cies inthe world require lots of innovation in emission technology and globalsing thejondon lexi experience, The cunten! technology is not suitable for bigger cities due to high emission, less fuel efficiency and bulky weight. The company has pledged to irvest a futher £80, million in esearch and development of TKS model with hybrid engines. Hybrid ond electic taxis are expected to rll cut from the new factory in 2018. Western manufacturers are also developing strong manu facturing bases in China to tap the opportunites presented by the increasing purchasing powers of Chinese people. Competition fom foreign manufacturer, cost pressures due jo stingen! regulatory requirements at home and valaiy in some expott matkels ate some of the current challenges for Geely. The management is searching for new opportunities t0 overcame these challenges. The Chinese slale extended is suppot! to fund Geely’s ‘oversees ombiions. China EXIM bank is offering a 20 balion yuan credit line te Geely. This is exciting news for privately ‘owned enterprises in China as favourable credit lines were mostly avoilable for the state owned enterprises (SOEs) unt recenlly This is an expected move from new Chinese leader ship team under chronic overcapacity and mounting losses of the State Ovined Enterprises. Geely’s ownership of London Taxi Company is an ex ‘ample of mubirational corporations {MNCS} fom emerging economies acquisition in the industial hearts of developed countries. This is @ fairly new phenomenon in international business which becoming more and move common with grow ing powers of emerging economies34 PART 1 » FOUNDATION CONCEPTS International business Performance of trade and ievestment activities by firms across national borders EXHIBIT 1.1 Elements of International Business Painted by Rodesck Bugadorfodeick hugador@dlsueduph) on 82 Questions 4-4. Whal might be the underlying motivations of emerging markets MNCS lite Geely’s acqui: sition of foreign cuto brand? 1-2, How does cooperation in international business offer competiveness? 4-3, What cole can the government play in promoting intematianalisction® SOURCES: Geely wars of owing infematonal presura on Chinas trends The nancial Times, Match 19, 2014 [wwe com) London Taxi Company Coventy plat ctente 1,000 jobs BBC. Mach 26, 2015 [swe co.uk): The Londen Taxi Company ofcial webs landers. cok) ‘Covent’ Marcy Worwickaie’ Mlanickshie life, Febuary 7, 2010 (wew.worwielshiele co.uk): Geely oficial webs [mwa global goely.coml; Lardans Black Cabe A Resin, onic Indust In Tine OF Upheaval Hufington Poe, Fabry 20, 2013 war hingtonpos co. ut); Chino Bxm Bark offs websie [English xanbark go en. (Chia SOE% restucting leaves sale camarcip inlet The Financial Times, March 12, 2015 wen h com] ‘As revealed in the opening case, intemational business touches our daily experiences, International business refers to firms’ performance of trade and investment activities across national borders. Because-it emphasizes crossing national boundaries, we also refer to inter- national business as cross-border business, Firms organize, source, manufacture, market, and conduct other value-adding activitios.on an international scale, They seek foreign customers and engage in collaborative relationships with foreign business partners. Although international business is performed mainly by individdal firms, governments and international agencies also conduct international business activities.’ Firms and nations exchange many physical and intel- lectual assets, including products, services, capital technology, know-how, and labor. In book, we are mainly concemed with the international business activities of the individual firm, International business is characterized by six major dimensions, as ilustrated in Exhibit 1-1 Firms’ growing international activities give rise to the globalization of markets. As they venture abroad, fiems undertake intemational trade and investment activities. In doing so, they encoun- ter various types of risks and challenges that occur to a lesser degree, Op hot at al, in the home country. Participants in international business are diverse and include firms, distribution chian~ nel intermediaries, and facilitators, When they expand abroad, firms employ such international ‘market entry strategies as exporting and direct investment. We explore each of the six dimen- sions in detail in this chapter, Cs Oy eee ceo 157.121.87 autodzed w use unl $/242023. Use beyond the(CHAPTER 1 » INTRODUCTION: WHAT IS INTERNATIONAL BUSINESS? 35 Although trading across borders has been around for centuries, contemporary international business has gained much momentum and complexity over the past four decades. Firms seck international market opportunities more than ever before, Like Vodafone, international business affects the everyday lives of people worldwide. Daily activities such as shopping, listening to ‘music, watching a movie, or surfing the Internct involve interactions and transactions that con- nnect.you to the global economy. Internationalization of business gives you access to products ‘and services from around the world. It profoundly affects your quality of life and economic well-being! Modert oiiie platforms such as Amazon, Alibaba, Facebook, and Instagram are also expressions of ongoing economic integration and growing interdependency of countries world- ‘wide, known as the globalization of markets. Globalization is a macro-trend of intense economic interconnectedness améng the-nations of the world, A parallel trend is the ongoing internation- alization of countless firms and dramatic growth in the volume and variety of cross-border transaetions in goods, services, and capital flows. Internationalization refers tothe tendency of ‘companies to deepen their internaticinal business activities systematically. thas led to widespread diffusion of products, technology, and knowledge worldwide, Globalization both compels and facilitates firms to expand abroad, Simultaneously, company internationalization has become casier than ever before. A few decades ago, international business ‘was largely the domain of large, multinational firms, Recent developments have created a more level playing field that allows all types of firms to benefit from active participation in interna tional business. In this book. you will read about the international activities of smaller firms and. those of large, multinational enterprises. You will learn about companies in the services sector that are internationalizing in such industries as banking, engineering, insurance, and retailing. What Are the Key Concepts in International Business? International trade describes the exchange of products (merchandise) and services (intan- giles) across national borders. Exchange can occur through exporting, the sale of products Oo services to customers located abroad from a base in the home country or a third country. Exchange also can take the form of importing or global sourcing—the procurement of prod- ucts of services from suppliers located abroad for consumption in the home country ot a third country. While exporting represents the outbound flow of products and services, importing isan inbound activity. Both finished products and intermediate goods (for example, raw materials and components) can be imported and exported, Painted by Rodedch Bugador fodeickbupador@su edu ph) on 61272016 tor Globalization of markets (ongoing econamic integration and growing interdependency of countnes wortuide. Internationalization The tendency of companies to deepen their international Business actives systematical, International trade Exchange of products and services acres national borders, typically through exporting and importing Exporting Sale of product o services 10 Customers located abroad from a base inthe home country ora third county. 1.1 Describe the key concepts in internationel business Importing oF global sourcing Procurement of products cc senvces from suppliers located abroad for consumtion in the home country ora thd country. 157.121.87 autodzed use unl $/242023, Use beyond theEXHIBIT 1.2 Comparing the Growth Rates of World GDP and World Exports Source Based onda from the Imerntional Monetary Fund, Word Economie Outlook Database Apa 2015, hws onplestral! pubstvneo/201SK/wendataindex spt PART 1 + FOUNDATION CONCEPTS International investment The transfer of assets to another country or the acquisition ofasets in that ‘county. InteFnational portfolio investrient Passive onnehid of foreign secures as tocks and bond (8 ‘generate Fnancilretue, Foreign direct investment (FD!) ‘An intexnationalzaton strategy in which the fim esabishes 2 ahyscal presence abroad through acquit of productive ‘assets such a capita, technology labor, land, plant, and equipment, International investment refers to the transfer of assets to another country or the acgui- sition of assets in that country. Economists refer to such assets as factors of production: they include capita, technology, managerial talent, and manufacturing infrastructure. Trade implies that products and services cross national borders. By contrast, investment implies that the frm itself crosses borders to secure ownership of assets located abroad. The two essential types of cross-border investment are international portfolio investment and foreign direct investment. International portfolio investment refers to the passive owner- ship of forcign securities such as stocks and bonds to gain financial returns. It does not entail active management or contol over these assets. The foreign investor has a relatively short-term interest in the ownership of these assets. Foreign direct investment (FDI) is an intemationalization strategy in which the firm establishes a physical presence abroad through acquisition of proiuctive assets such as land, plant, equipment, capital, and technology. It is a foreign-market entry strategy that gives inves: {ors partial or full ownership of a productive entoprse typically dedicated to manufacturing. marking’ o¢ management activities. Investing such resources abroad is generally forthe long term and involves extensive planning. ‘The Nature of International Trade Overall, export growth has outpaced the growth of domestic production during the past few decades, illustrating the fast pace of globalization. Exhibit 1.2 contrasts the growth of total ‘world exports with the growth of tofal world gross domestic product (GDP) since 1980. GDP. is defined as the total value of produets and services produced in a country in the course of a year. Following a 27-year boom, world trade declined in 2009 due to the global recession. However, trade revived and returned to normal levels by 2012. Trade was a key factor redue- ing the impact of the global recession.? What ig-remarkable is that, since 2008, the annual rate of growth in world exports surpassed that of World GDP by almost a factor of two (5.4 versus 2.8 percent). ‘Three factors have been especially notable in explainiag WhY.trade growth has long out- paced GDP growth. First is the rise of emerging markets during the past three decades. These rapidly developing economies are home to swifily growing middle-clasy households possessing substantial disposable income. Second, advanced (or developed) economies uch as the United ‘States and the European Union are now sourcing many’ of the products they consume from such low-cost manufacturing locations as China, India, and Mexico. Third, advances in information(CHAPTER 1 » INTRODUCTION: WHAT IS INTERNATIONAL BUSINESS? 37 (ool aul ae of pods wade pos mpo abort US cls CY) Tl ana ae of roduc ade pons nga a pee of non GOF EXHIBIT 1.3 and transportation technologies, decline of trade barriers, and liberalization of markets all con- Leading Countries in E tvibute to rapid growth of trade among nations International Merchandise Exhibit 1.3 identifies leading nations in merchandise exports (not services). Page}(@yéhows Trade ‘he total annual value of merchandise exports and imports in billions of U.S. dollars: Panel (B) — susan ta foe Wo shows the annual value of proiuets waded as a percentage ofeach nation's GDP. During the fe-Y Ban Wor Devnet cent global ecesion, China surpassed the United Stats to hecome the word's leading exporter os ak, Wasintn DC 2018 in toa dollar tems, Trade accounts fr bout 45 percent of China's GDP as opposed to 23 per- (myweb Nod Te cent forthe United States, Merchandise trae i a much larger component of economic activity NE mbae in counties such as Belgium (125 percent) and the Netherlands (18 percent). These percent- sy wn ature UNCTAD rd ages suggest that some countries depend very heavily on interational trade eative othe value mesma Rr Non Ys Une of all goods and services they produce domestically Neo (019, name How can the magnitude of trade atvity surpass 100 perceat of a nation's GDP? How can tad activity be a multiple of national value added? The answer is that coustries such as Singapore, Hong Kong. and the Netherlands are known as enepdt economies. Entrepot is from the French fr “intermediate depot” Such countries import large volume of pre ues, some of which they process into hisher value-added products and some they simply re-export to other destinations. For example, Singapore ix a major enirepd for petoleum Poxicts it receives from the Middle Fast, which it then exports to China and other destna- tions in Asia The Nature of International Investment OF the two types of investment flows—portfolio investment versus foreign direct investment— ‘we are concerned primarily with foreign direct investment (FDI) in this text because it is the ultimate form of internationalization and encompasses the widest range of international business involvement. FDI is the foreign entry strategy practiced by the most internationally active firms. Companies usually undertake FDI for the long term and retain partial or complete ownership of the assets they acquire. In the process, the firm establishes « new legal business entity in the host ‘country, subject to the regulations of the host government. FDI is especially common among large, resourceful companies with substantial inter- national operations. For example, many European and U.S. firms have invested in China, India, and Russia to establish plants to manufacture or assemble products, taking advantage of low-cost Iabor or natural resources in these countries. At the same time, companies from these rapidly developing economies have begun to invest in Western markets. In 2008, the Turkish company Yildiz acquired the premium chocolate maker Gosia from US-based Campbell Printed by Rodack Bugador (odedck bugador@dlaueduph) on 127/206 tom 22067 121.87 authotzed to use unt 4128/2029. Use beyond the3B PART 1 + FOUNDATION CONCEPTS EXHIBIT 1.4 Foreign Direct Investment (FDI) Inflows into World Regions (in Billions of U.S. Dollars per Year) Sous UNCTAD, UNCTADSTAT DaxabastTyvard EDI Pas, Annus 2015; UNCTAD, Glob miner Trends Monitor Mo. 18, aay 2, 2015; UNCTAD, World meme Prospects Sues 2015-2015,201% ‘Won 19¢2 1984 1095 1988 1090 4952 098 1696 199 2000 2002 2008 2008 2008 2018 2012 2014 Soup Company in a deal valued at $850 million. In 2014, it paid more than $3 billion dollars to acquire British-based cookie and snack maker United Biscuits.’ Exhibit 1.4 illustrates the dramatic growth of FDI since\the 1980s. The exhibit reveals that the dollar volume of FDI has grown immensely since the 198%, especially in developed (advanced) economies such as Japan, Europe, and North America. FDV inflows to the develop- ing economies began to surpass those to the advanced economies in about 2019. FDI inflows ‘were interrupted in 2001 as investors panicked following the September 11 terrorist attacks in the United States. The inflows were interrupted again in 2008 by the global recession. These dips underscore the importance of maintaining stability in the world economy. Despite these setbacks, the overall trend remains strong and growing over time. Particularly significant is the ‘growth of FDI into developing economies, much of which results from their need for modern industrial infrastructure. It reflects the growing importance of developing economies and emerg- ing markets as target markets and sourcing bases, Services as Well as Products Historically, international trade and investment were mainly the domain of companies that make and sell products—tangible merchandise such as clothing, computers, and motor vehicles. ‘Today, firms that produce services (intangibles) are key international business players as well, Services are deeds, performances, or efforts performed directly by people working in banks, consulting firms, hotels, construction companies, retailers, and countless other firms in the ser- ‘vices sector. International trade in services accounts for about one-quarter of all international trade and is growing rapidly. ‘Vodafone in the opening case is a leading services firm that has internationalized rapidly. If ‘you own a house, your mortgage might be underwritten by the Dutch bank ABN Amro. Perhaps ‘you eat lunch in a cafeteria owned by the French firm Sodexho, which manages the food and ‘beverage operations on numerous university campuses. Recently, Riot Games expanded its op= erations into Germany, Ireland, China, and Turkey to meet rapidly rising demand for its online vvideo games. Demand for the firm’s League of Legends game has spread rapidly, prompting the need to establish offices at gamer locations worldwide. The 2015 League of Legends World ‘Championship attracted fans from around the world for two weeks of competition and more than 100 hours of live content broadcast in 19 languages." by Rodedich Bugador fede 67.121.87 autos to use unt 424 ond the