INTRODUCTION TO INTERNATIONAL BUSINESS

The VRIO Framework

-to enable firms to judge which resources and capabilities are valuable and should be developed
further, the VRIO Framework can be applied
VRIO – the resource-based framework that focuses on value (V), rarity (R), imitability (I),
organizational (O) aspects of resources and capabilities.
• Value: Does the resource/capability add value?
• Rarity: Is the resource/capability accessible for other firms as well?
• Imitability: Can other firms copy the resource/capability?
• Organization: Is our firm organized in a way that we can capture the value of the
resource/capability?
The Unified Framework – Tool for analysis
Institution-based view (formal and informal rules of the game)
Resource-based view (firm-specific resources and capabilities)
Fundamental question: What determines the success and failure of firms around the globe?

The three-level approach

• Country (ex. Swot; Pestel, Cargo)
• Industries (ex. HHI, Industry Concentration Index, Porter´s 5 Forces)
• Company (ex. Porters Value Chain, Generic Strategies, Blue Ocean)

Three generic strategies

• Cost leadership – superior profit through lower costs (ex. Walmart)
• Differentiation – creating a product or service that is perceived as being unique
“throughout the industry” (ex. McDonald´s)
• Focus – concentrating on a limited part of the market
Value chain
-series of activities used in the production of goods and services, which makes them more
valuable
-consists of primary and support activities
-each activity needs a certain amount of resources and capabilities
-primary activities (sales, marketing, operation, logistics)
-support activities (HR, pursuiment, technological advancement)

Product diffusion curve

-consumers can be grouped according to how quickly they adopt a new product
-some can adopt the product as soon as it is available, but some are the last to purchase
-innovators: risk-takers (first 2.5%)
-early adopters: based on positive response from innovators, they will purchase the product
(13.5%)
-early majority: based on proofs by early adopters, they will purchase the products (34%)
-late majority: they will purchase the product after it has become commonplace (34%)
-laggards: they avoid changes and may not adapt the product until traditional alternatives no
longer available (16%)
Product life cycle

Institution-based view in a nutshell

Institution - based view
-a leading perspective in global business that suggests that firm performance is, at least in part,
determined by the institutional frameworks governing firm behaviour around the world
Institutional framework
• Formal institutions (laws, regulations, rules)
• Informal institutions (cultures, ethics, norms)

What do institutions do?

-influence decision-making process of individuals and firms → by constraining the range of
acceptable actions
→ institutions reduce uncertainty
-economic uncertainty leads to transaction costs → source is opportunism
-transaction costs – costs associated with economic transactions of, more broadly the costs of
doing business
-opportunism – the act of seeking self – interest with guile (lukavstvo)
-opportunity costs – what are you giving up when you choose another alternative?

What is culture?
-consists of backgrounds, assumptions, expectations, ways of communication, values, beliefs,
rules
-ethnocentricity: think you are better than others
-cultural literacy: understand others and work better
Components of culture
• Aesthetics
• Values and attitudes
• Manners and customs
• Social structure
• Religion
• Personal communication
• Education
• Physical environments

Hofstede´s cultural dimensions

• Power distance
• Individualism
• Masculinity
• Uncertainty avoidance
• Long term orientation
• Indulgence (zadovoljenje)

Institutions, resources and corporate social responsibility

Institutions based view – formal institutions governing CSR in home/host countries informal
norms, values and cultures governing CSR
-doing things that are good for people, not only profitable for the company
Resoruce – based view – value, rarity, imitability, organization (VRIO)
-they lead to corporate social responsibility

Resources/Capabilities
-tangible and intangible assets used by a firm to choose and implement its strategies
-tangible resources – assets that are observable and easily quantified
• Physical
• Financial
• Technology
-intangible resources – assets that are hard to observe and difficult to quantify
• Human
• Innovation
• Reputation
The resource – based view in a nutshell
-a leading perspective in global business that suggests that firm performance is, at least in part,
determined by its internal resources and capabilities
-all firms differ in what they know or possess as well as how they do business

The pyramid of corporate social responsibility

Economic freedom and wealth

Growth of global trade and GDP
Development of nations
-economic development reflects economic well-being measured by output, infrastructure,
health, education…
-productivity drives economic growth (output/input)
-key economic figures
- Gross National Product (GNP): Total value of goods and services produced in a year
by country´s nation
- Gross Domestic Product (GDP): Total value of goods and services produced within a
country´s borders
-important figures to assess national development and market potential
-drawbacks are volunteer work, unpaid household, illegal activities, unreported cash
transactions, barter
Purchasing Power Parity (PPP)
-compares the different prices of different countries and it shows the real price of a product
-Why is this different to the GDP?
-GDP just compares overall economic profit of the country

Burgernomics – the latest Big Mac

-index suggests the euro is still overvalued add smth
Human Development Index (HDI) add something
-shows the standard of the countries, based on the level of health, education, lifestyle
The WTO (World Trade Organization)
-contracts between member nations to maintain fair and open trade policies
-3 goals:
- Help free flow of trade
- Help negotiate further opening of markets
- Settle trade disputes between its members
Political ideologies
- Totalitarianism: every aspect of people´s lives must be controlled to preserve order
- Pluralism: both private and public groups need to balance each other´s power
- Anarchism: only individuals and private groups can preserve personal liberties

Political risk
-likelihood that a government or society will undergo political change that negatively affects
business
-examples of political risks are:
• Corrupt or poor political leadership
• Frequent changes in the form of government
• Political involvement of religious or military leaders
• Conflict among race, religions, or ethnical groups
• Unstable political system
• Poor relations with other countries

Types of legal systems:

• Common law (11th century AC)
- Traditional: legal history
- Precedent: past cases
- Usage: ways law is used
- Ex. US, UK, Canada, Australia
• Civil law (5th century BC)
- World´s oldest most common legal tradition
 - Written rules = legal code
- Ex. Western Europe, Central / South America
• Theocratic law
- Based on religious teaching
- Ex. Islamic, Hindu, Jewish law

Economic systems
-differ by country
-economic systems consist of structure and processes to allocate resources and conduct
commercial activities like production of good and services
• Centrally planned: government ownership of economic resources and state planning
• Mixed economy: government and private ownership of economic resources split
• Market economy: mostly private ownership of economic resources

Growth of global trade and GDP

-the higher the GDP, the more economic freedom

Absolute advantage
-one is more efficient than the other (Adam Smith)
-greater output than any other nation with same/smaller input
-assumptions
• Two countries
• Two products
• No transportation costs
Comparative advantage
-If one country has an absolute advantage in the production of both products, still trade is
beneficial
-although tealand is unable to produce either rice or tea more efficiently than Riceland, Tealand
produces tea more efficiently than it produces rice

New Trade Theory (Krugman)

-even if they make similar products, it could be beneficial for trade
-fundamentals:
• gains from specialization and increasing economies of scale
• network effects lead to competitive advantages
• companies first to market create barriers to entry
• government may help by assisting home companies

First-mover advantage
-economic and strategic: advantage of being first to enter an industry
-may create a formidable barrier to market entry for potential rivals

Why governments intervene in trade?

-free trade: the pattern of imports and exports that would result in the absence of trade barriers
(no borders, no controls)
-motives government intervene:
-political motives
-economic motives
-cultural motives

Free trade
-free trade is a policy where governments do not discriminate against imports and exports
-there are few or no restrictions on trade and markets are open to both foreign and domestic
supply and demand

Cost of trade
Methods of promoting and restricting trade
-Trade promotion
• Subsidies
• Export financing
• Foreign trade zones (FTZ)
• Special government agencies
-Trade restriction
• Tariffs
• Quotas
• Embargoes
• Local content requirement
• Administrative delays
• Currency controls

Tariffs
-government tax levied on a product as it enters or leaves a country
-three types of tariffs
• Export tariffs: Placed on an exported product
• Import tariff: Placed on products being imported
• Transit tariff: Placed on a product that is just “passing through” on the way to it´s final
destination

Reasons to use tariffs:

• Protect domestic producers
• Generate revenue
Tariff-quota
-imposes a lower tariff rate for a certain quantity of imports and a higher rate for quantities that
exceed the initial data (ex. Chiquita)
Quotas
-a restriction on the amount of a good that can be imported or exported from the country
-reason to import quotas – protect its domestic producers
-reasons to export quotas
• Maintain adequate supplies of product in home market (ex. natural resources)
• Restrict supplies on world market
• Voluntary export restrains (VER): Self-impose restraint in response to threat of an
import quota

Embargo
-a complete ban on trade between countries
-accomplish political goals (ex. US and Cuba)

Local Content Requirements

-producers must supply specific amount of goods or services in domestic market
-the purpose is to force companies to use local resources in the production of their goods
-usage in many developing countries

Administrative delays
-bureaucratic rules designed to make it difficult to import products into a country (ex. Time
delay, special license) – to protect a country
-protectionism: a way for a country to discriminate against imported products

Currency control
-restrictions on the convertibility of a currency
-government can discourage imports by restricting who is allowed to convert national currency
into international accepted currency (USD, EUR, YEN) or stipulate exchange rate

Multilateral agreements to liberalize trade – WTO

-created on January 1, 1995
-IO which regulates trade between nations
-3 main goals of the WTO
• Help the free flow of trade
• Negotiate further opening of markets
• Settle trade disputes between members
-WTO replaced the GATT and GATS

Levels of regional integration

-degrees of integrations

• Free Trade Area: remove all barriers to trade between nations, ex. NAFTA
• Customs Union: establish common trade policy against non members, ex.
MERCOSUR
• Common market: movement of labour and capital between members, ex. EEA
• Economic Union: coordinate economic policies, harmonize tax, monetary and fiscal
policies and create common currency, ex. EU
• Political Union: United States provides early example of political union

Pros and Cons of Regional Economic Integration

Pros:
• Promotes peace
• Free trade and investment raise incomes and stimulate economic growth
• Enables to handle disputes constructively
• Consistent rules prevent discrimination
Cons:
• Discrimination against firms outside of region
• Loss of sovereignty
• Trade Diversion: for non-members. Risk of increase trade with less efficient
members and reduce trade with more efficient non members
• Shift in employment: shift of unskilled production to low-wage nations
Foreign Direct Investment (FDI)
-a foreign direct investment (FDI) is an investment made by a firm or individual in one country
into business interests located in another country
-FDI takes place when an investor establishes foreign business operations or acquires foreign
business assets in a foreign company
-with FDI the investor gains management control rights (ex. Appoint key managers). To do so,
at least 10% of the equity stake is needed

Foreign Portfolio Investment (FPI)

-holding securities of a firm in another country without a controlling interest
-a company investing in a company in foreign country with a stake of less than 10% is doing a
portfolio investment
Shengen agreement
-deal between several European countries to make traveling between those countries easier (no
need for for passport checks)

Francheising
-business partnership where one person lets another person use their business idea, brand and
support in exchange for money (Tchibo)
Licensing
-giving permission to someone else to use your idea, brand, product in exchange for money
(use a specific thing)
Why do companies invest in other countries?
• Strategic expansion
• Resource access
• Cost reduction
• Brand building
• Tax incentives
• Competitive positioning
The OLI Paradigm (countries invest in other countries)
• Ownership advantages
• Location advantages FDI/MNE
• Internalization advantages

Internalization advantages
-replacement of cross-border markets with one firm located in two or more countries
→ response to the imperfect rules governing international transactions
Location advantages
-advantages derived by a firm from the place in which it operates
Ownership advantages
-possessing and leveraging of certain valuable, rare, hard to imitate, and organizationally
embedded (VRIO) assets overseas

The OLI framework as Decision Tree

-as such, FDI is the last option for a firm to internationalize
-if firms could we won´t see any FDI

Liability of foreigners
-challenges a company might have when operating in other countries
-institution based view
• regulatory risks
• trade and investment barriers
• differences in cultures, norms and values
-resource-based view
• value
• rarity
• imitability
• organization
lead to: Foreign Market Entries: where, when, how
Liability of foreigners
-the costs that firms operating outside home countries experience above those incurred by local
firms
-inherent disadvantage faced by foreign firms in host countries because of their nonnative status
• differences in formal and informal institutions govern the rules of the game in different
countries
• discrimination of foreign firms

Country of Origin Effect

-a psychological effect describing consumer’s attitudes are influenced by product’s country of
origin labelling
Alternative motives for internationalization

Forms of the International enterprise (add a table)

Multinational strategies and structures: The Integration-Responsive (I/R) Framework

Pressure for local reponsiveness

Link between strategy types (Bartlett and Goshal and Peng) write

Global Human Resource Management – Staffing Policy

-staffing policy is concerned with the selection of employees who have the skills required to
perform a particular job
3 approaches of staffing policies within IB
- the ethnocentric approach
- the polycentric approach
- the geocentric approach

Link between internationalization strategy and staffing policy

Marketing mix – the 4 P´s

• Product
- Functionality
- Appearance
- Quality
- Packaging
- Brand
- Warranty
- Service/support
• Price
- List price
- Discounts
- Allowances
- Financing
- Leasing options
• Place
- Channel members
- Channel motivation
- Market coverage
- Locations
- Logistics
- Service levels

• Promotion
- Advertising
- Personal selling
- Public relations
- Message
- Media
 - Budget

● Global enterprise (same for every country) - same coordinated markets

● International enterprise - import and export companies, do not develop and open
franchisees outside of their host country
● Multinational enterprise - have investments on other countries, focused on adapting
products to the market of each local market
● Transnational enterprise - they have investment outside, but they give decision-making
process to executives on individual foreign markets (not centralized) ex. Nestle

Six reasons why governments intervene in trade

• To respond to unfair trade
• To gain influence over smaller nations
• To preserve national security
• To protect infant industries
• To pursue a strategic trade policy
• To protect the country’s unique culture

Four major motives for entering the market:

• To take advantage of lower production costs - Generate economies of scale
• Asess new customers - find new customers
• to follow the competition - Knowledge, know-how, technology ( Chinese company
buys German Company )
• To diversify risk ( if there is a choice - to have access to resources) - Iron Ore etc.
Chinese company goes to Africa/South America.

Single Market
-involves the free circulation of goods, capital, people and services within the member states.
Customs union
-the application of a common external tariff on all goods entering the market.

Which of the following is an example of FDI (Foreign Direct Investment)?

-The construction of a factory in Shanghai by an American MNC
-FDI involves the direct investment in facilities, such as factories or businesses, in a foreign
country by a foreign firm.
-In this case, the American multinational corporation is making a direct investment by
constructing a factory in Shanghai.

Which of the following is not a non-tariff barrier?

-A tax equal to 12% of value on imported oil

What is the main difference between tariff and quota?

-A tariff generates government revenue while a quota, unless it is sold, no

Political risks in international business ?

Managing political risks
-Adaptation (incorporate in business strategy)
-Information gathering (predict risks)
-Influencing Local Parties

WTO: World Trade Organization

EU: European Union
GDP: Gross Domestic Product
PPP: Purchasing Power Parity
NPV: Net Present Value
HR: Human Resources
CEO: Chief Executive Officer
CFO: Chief Financial Officer
UN: United Nations
VAT: Value Added Tax
GNP: Gross National Product
IMF: International Monetary Fund
SWOT: Strengths, Weaknesses, Opportunities, Threats

Advantages of Free Trade:

-Free trade is beneficial to society because it eliminates import and export tariffs.
-Restricted trade affects the welfare of society because although producers experience
increases in surplus, the loss faced by consumers is greater than any benefits obtained

Political risk
• Poor relations with other countries
• Corrupt or political leadership
• Frequent changes in the form of government
• Political involvement or religious or military leaders
• Conflict among race, religions or ethical groups
• Unstable political system

Case studies
1. Fiji case study
• Topic: CSR, marketing
• Country: Fiji/South Pacific
• Industry: Beverages
2. Chiquita case study
• Topic: Politics of trade and protectionism
• Country: Panama
• Industry: Food
3. L´Oreal
• Globalization, supply chain
• France
• Cosmetics
4. Four Seasons
 • National cultures
• Canada
• Hotel/Service
5. Mittal Steel
• FDI
• India
• Steel
6. Huangeng Power International
• Finance, Global financial markets
• PRC
• Energy
7. European Energy Market
• Regional integration
• EU
• Energy
8. IKEA
• Entry modes
• Sweden
• Furniture
9. Dove
• Marketing, branding
• The Netherlands
• Soap
10. Tchibo
• Selecting and managing entry modes
• Austria
• Consumer ables