GLOBALIZATION

Module 2
 Learning Outcomes

After completing the module, the students can:

1. Discuss different types of International business.
2. Identify the examples of Global corporations.
3. Learn the Pros and Cons of Licensing.
4. Understand how to manage an International corporation.
What is International Business

• International business describes all of the commercial transactions, both

governmental and private, that take place between different countries.
• Though the term international business is a relatively new concept, international
trade has been around since the dawn of civilization.
• Ancient cultures such as the Roman Empire, Egypt, and Europe traded different
goods.
• Merchants traveled great distances to foreign lands to make money and
business connections. Even archaeology reveals the various routes people
traveled in different regions of the world.
What is International Business

• Basically, international business is a cross border transaction

between individuals, businesses, or government entities. The
transaction can be of anything that has value, examples
include 
• Physical Goods
• Services such as banking, insurance, construction, etc.
• Technology such as software, arms, and ammunition,
satellite technology, etc.
• Capital and
• Knowledge
 Types of International Business

Countertrade
 
- Countertrade means
exchanging goods or services
which are paid for, in whole or
part, with other goods or
services, rather than with
money. A monetary valuation
can, however, be used in
counter trade for accounting
purposes. Any transaction
involving exchange of goods or
service for something of equal
value. Bartering: Bartering involves exchanging goods or services for other goods or
services as payment.
 Types of International Business

There are five main variants of countertrade:

 
1. Barter: Exchange of goods or services directly for other goods or services
without the use of money as means of purchase or payment.
2. Switch trading: Practice in which one company sells to another its
obligation to make a purchase in a given country.
3. Counter purchase: Sale of goods and services to one company in
another country by a company that promises to make a future purchase of
a specific product from the same company in that country.
 Types of International Business
There are five main variants of countertrade:
 
4. Buyback: This occurs when a firm builds a plant in a country, or
supplies technology, equipment, training, or other services to the
country, and agrees to take a certain percentage of the plant’s output as
partial payment for the contract.
5. Offset: Agreement that a company will offset a hard currency
purchase of an unspecified product from that nation in the future.
Agreement by one nation to buy a product from another, subject to the
purchase of some or all of the components and raw materials from the
buyer of the finished product, or the assembly of such product in the
buyer nation.
 
 Types of International Business
Direct Investment

 Direct investment is more commonly referred

to as foreign direct investment (FDI).
 FDI refers to an investment in a foreign
business enterprise designed to acquire a
controlling interest in the enterprise.
 The direct investment provides capital funding
in exchange for an equity interest without the
purchase of regular shares of a company's Sao Paulo, Brazil: Sao Paulo, Brazil, is home to a growing middle class
and significant direct investments.
stock.
 Types of International Business

 Franchising

 In exchange, the franchisee will pay a certain percentage of the profits of

the venture back to the franchiser.
 The franchiser will also often provide training, advertising, and assistance
with products.
 Why Franchise?

Lower Barriers to Entry

 
 Franchising is a particularly useful practice when approaching
international markets.
 For the franchiser, international expansion can be both complex
and expensive, particularly when the purchase of land and
building of facilities is necessary.
 With legal, cultural, linguistics, and logistical barriers to entry in
various global markets, the franchising model offers and simpler,
cleaner solution that can be implemented relatively quickly.
 
Why Franchise?

 
Localization
 
 Franchising also allows for localization of the brand, products,
and distribution systems. This localization can cater to local tastes
and language through empowering locals to own, manage, and
employ the business.
 This high level of integration into the new location can create
significant advantages compared to other entry models, with
much lower risk.
 Why Franchise?
Speed

 It is also worth noting that franchising is a

very efficient, low cost and quickly
implemented expansionary strategy.
 Franchising requires very little capital
investment on behalf of the parent
company, and the time and effort of
building the stores are similar outsources to
the franchisee.
 As a result, franchising can be a way to
rapidly expand both domestically and
globally.

Starbucks’ Expansion: Starbucks operates with a wide variety of strategic

alliances, including a franchising program.
Downsides to Franchising
 Franchising has some weaknesses as well, from a strategic point of
view. Most importantly, organizations (the franchisers) lose a great deal
of control.
 Quality assurance and protection of the brand is much more difficult
when ownership of the franchise is external to the organization itself. 
 It is also of importance to keep the risk/return ratio in mind.
 While the risk of franchising is much lower in terms of capital
investment, so too is the returns derived from operations (depending on
the franchising agreement in place).
 Types of International Business
Multinational Firm
 multinational corporation (MNC) or multinational enterprise (MNE) is a corporation
registered in more than one country or has operations in more than one country.
 It is a large corporation which both produces and sells goods or services in various
countries. It can also be referred to as an international corporation.
 Corporations may make a foreign direct investment. Foreign direct investment is direct
investment into one country by a company located in another country. Investors buy a
company in the country or expand operations of an existing business in the country.
 A corporation may choose to locate in a special economic zone, a geographical region
with economic and other laws that are more free-market-oriented than a country’s
typical or national laws.
 Types of International Business
Off Shoring
 “Offshoring” is a company’s
relocation of a business process from
one country to another.
 This typically involves an operational
process, such as manufacturing, or a
supporting process, such as
accounting. Even state governments
employ offshoring.

Worldwide Offshoring Business: The worldwide offshoring business is

projected to equal $500 billion by 2020.
 Types of International Business
Joint Venture
 venture is a business agreement in
which parties agree to develop a new
entity and new assets by contributing
equity.
 They exercise control over the
enterprise and consequently share
revenues, expenses and assets.

Joint Venture: Sony Ericsson is a joint venture between Swedish telecom

corporation Ericsson and Japanese electronics manufacturer Sony.

(When two or more persons come together to form a partnership for the purpose of carrying out a project, this is called a joint venture. In this scenario, both parties
are equally invested in the project in terms of money, time and effort to build on the original concept. While joint ventures are generally small projects, major
corporations use this method to diversify)
 Types of International Business
Outsourcing
 Outsourcing is the contracting out of
a business process, which an
organization may have previously
performed internally or has a new
need for, to an independent
organization from which the process
is purchased back as a service. Outsourcing: Outsourcing is the process of contracting an existing business
process to an independent organization. The process is purchased as a
service.

The opposite of outsourcing is called in sourcing, and it is sometimes accomplished via vertical
integration. However, a business can provide a contract service to another business without
necessarily in sourcing that business process.
 Types of International Business
Importing
 considering entering international
markets, there are some significant
strategic and tactical decisions to be
made.
 Exporting, joint ventures, direct
investment, franchising, licensing, and
Licensing: The 1933 Fiat 508 was manufactured under
various other forms of strategic a license in Poland by Polski Fiat.
alliance can be considered as market 
entry modes.
 Types of International Business
Licensing
 The term “import” is derived from the
concept of goods and services arriving
into the port of a country.
 The buyer of such goods and services
is referred to as an “importer” and is
based in the country of import
whereas the overseas-based seller is
referred to as an “exporter.” Singapore: The Port of Singapore is one of the busiest ports in the
world. Singapore has to import most of its food and consumer goods.

Imported goods or services are provided to domestic consumers by foreign producers. An import in the
receiving country is an export to the sending country. Imports, along with exports, form the basics of international
trade. Import of goods normally requires the involvement of customs authorities in both the country of import and
the country of export
What is licensing?

 A licensor (i.e. the firm with the technology or brand ) can provide their
products, services, brand and/or technology to a licensee via an
agreement.
 This agreement will describe the terms of the strategic alliance, allowing
the licensor affordable and low risk entry to a foreign market while the
licensee can gain access to the competitive advantages and unique
assets of another firm.
 The Pros and Cons
 
Before deciding to use licensing as an entry strategy, it’s important to
understand in which situations licensing is best suited.
  Advantages
 
Licensing affords new international entrants with a number of advantages:
 
 Licensing is a rapid entry strategy, allowing almost instant access to the market with the right
partners lined up.
 Licensing is low risk in terms of assets and capital investment. The licensee will provide the
majority of the infrastructure in most situations.
 Localization is a complex issue legally, and licensing is a clean solution to most legal barriers
to entry.
 Cultural and linguistic barriers are also significant challenges for international entries.
Licensing provides critical resources in this regard, as the licensee has local contacts, mastery
of local language, and a deep understanding of the local market.
 
 The Pros and Cons
 
Before deciding to use licensing as an entry strategy, it’s important to understand in
which situations licensing is best suited.
 
Disadvantages
 
While the low-cost entry and natural localization are definite advantages, licensing also
comes with some opportunity costs:
 
 Loss of control is a serious disadvantage in a licensing situation in regards to quality control.
Particularly relevant is the licensing of a brand name, as any quality control issue on behalf
of the licensee will impact the licensor’s parent brand.
 Depending on an international partner also creates inherent risks regarding the success of
that firm. Just like investing in an organization in the stock market, licensing requires due
diligence regarding which organization to partner with.

Lower revenues due to relying on an external party is also a key disadvantage to this
model. (Lower risk, lower returns.)
 Types of International Business
Contract manufacturing
  is the outsourcing of part of the
manufacturing process of a product to
a third-party. More specifically,
contract manufacturing is an
outsourcing of certain production
activities that were previously
performed by the manufacturer to a
Contract Manufacturing: Ness Corporation is a
third-party.  contract manufacturer in Seven Hills, Australia.
Contract manufacturing
Benefits
 
Contract manufacturing offers a number of benefits:
 
 Cost Savings: Companies save on their capital costs because they do not have to pay for
a facility and the equipment needed for production. They can also save on labor costs such
as wages, training, and benefits. Some companies may look to contract manufacture in low-
cost countries, such as China, to benefit from the low cost of labor.
 Mutual Benefit to Contract Site: A contract between the manufacturer and the company
it is producing for may last several years. The manufacturer will know that it will have a
steady flow of business at least until that contract expires.
 Advanced Skills: Companies can take advantage of skills that they may not possess, but
the contract manufacturer does. The contract manufacturer is likely to have relationships
formed with raw material suppliers or methods of efficiency within their production.
Contract manufacturing
Benefits
 
Contract manufacturing offers a number of benefits:
 
 Quality: Contract Manufacturers are likely to have their own methods of quality control in
place that help them to detect counterfeit or damaged materials early.
 Focus: Companies can focus on their core competencies better if they can hand off base
production to an outside company.
 Economies of Scale: Contract Manufacturers have multiple customers that they produce
for. Because they are servicing multiple customers, they can offer reduced costs in
acquiring raw materials by benefiting from economies of scale. The more units there are in
one shipment, the less expensive the price per unit will be.
Contract manufacturing

Risks
 
Balanced against the above benefits of contract manufacturing are a number of risks:
 
 Lack of Control: When a company signs the contract allowing another company to produce their
product, they lose a significant amount of control over that product. They can only suggest strategies
to the contract manufacturer; they cannot force them to implement those strategies.
 Relationships: It is imperative that the company forms a good relationship with its contract
manufacturer. The company must keep in mind that the manufacturer has other customers. They
cannot force them to produce their product before a competitor’s. Most companies mitigate this risk
by working cohesively with the manufacturer and awarding good performance with additional
business.
Contract manufacturing
Risks
 
Balanced against the above benefits of contract manufacturing are a number of risks:
 
 Quality: When entering into a contract, companies must make sure that the manufacturer’s
standards are congruent with their own. They should evaluate the methods in which they test
products to make sure they are of good quality. The company has to ensure the contract
manufacturer has suppliers that also meet these standards.
 Intellectual Property Loss: When entering into a contract, a company is divulging their formulas or
technologies. This is why it is important that a company not give out any of its core competencies to
contract manufacturers. It is very easy for an employee to download such information from a
computer and steal it. The recent increase in intellectual property loss has corporate and government
officials struggling to improve security. Usually, it comes down to the integrity of the employees.
Contract manufacturing
Risks
 
Balanced against the above benefits of contract manufacturing are a number of risks:
 
 Outsourcing Risks: Although outsourcing to low-cost countries has become very popular, it does
bring along risks such as language barriers, cultural differences, and long lead times. This could make
the management of contract manufacturers more difficult, expensive, and time-consuming.
 Capacity Constraints: If a company does not make up a large portion of the contract
manufacturer’s business, they may find that they are de-prioritized over other companies during high
production periods. Thus, they may not obtain the product they need when they need it.
 Loss of Flexibility and Responsiveness: Without direct control over the manufacturing facility, the
company will lose some of its ability to respond to disruptions in the supply chain. It may also hurt
their ability to respond to demand fluctuations, risking their customer service levels.
 
 Types of International Business
Exporting
  This term “export” is derived from the
concept of shipping goods and
services out of the port of a country.
 The seller of such goods and services
is referred to as an “exporter” who is
based in the country of export
whereas the overseas based buyer is
referred to as an “importer”.
 In international trade, exporting refers
Oil Exports 2006: The map shows barrels of oil
to selling goods and services produced
exported per day in 2006. Russia and Saudi Arabia
in the home country to other markets. exported more barrels than any other oil-exporting
countries.
 Types of International Business

Global Corporation
  global company is generally referred to as a multinational corporation (MNC). An MNC is a
company that operates in two or more countries, leveraging the global environment to approach
varying markets in attaining revenue generation.
 International operations are therefore a direct result of either achieving higher levels of revenue
or a lower cost structure within the operations or value-chain.
 MNC operations often attain economies of scale, through mass producing in external markets at
substantially cheaper costs, or economies of scope, through horizontal expansion into new
geographic markets.
 Types of International Business
Opportunities
  As gross domestic product (GDP)
growth migrates from mature
economies, such as the US and EU
member states, to developing
economies, such as China and India, it
becomes highly relevant to capture
growth in higher growth markets.

GDP Growth Rate by Country: This map highlights where the

strongest growth opportunities currently are, as of 2010. In that year
China and India had the highest GDP growth rates.
Opportunities
Challenges
 
However, despite the general opportunities a global market provides, there are significant challenges
MNCs face in penetrating these markets. These challenges can loosely be defined through four
factors:
 
 Public Relations: Public image and branding are critical components of most businesses. Building
these public relations potentials in a new geographic region is an enormous challenge, both in
effectively localizing the message and in the capital expenditures necessary to create momentum.
 Ethics: Arguably the most substantial of the challenges faced by MNCs, ethics have historically played
a dramatic role in the success or failure of global players. For example, Nike had its brand image
hugely damaged through utilizing ‘sweat shops’ and low wage workers in developing countries.
Maintaining the highest ethical standards while operating in developing countries is an important
consideration for all MNCs.
Opportunities
Challenges
 
However, despite the general opportunities a global market provides, there are significant challenges
MNCs face in penetrating these markets. These challenges can loosely be defined through four
factors:
 
 Organizational Structure: Another significant hurdle is the ability to efficiently and effectively
incorporate new regions within the value chain and corporate structure. International expansion
requires enormous capital investments in many cases, along with the development of a specific
strategic business unit (SBU) in order to manage these accounts and operations. Finding a way to
capture value despite this fixed organizational investment is an important initiative for global
corporations.
 Leadership: The final factor worth nothing is attaining effective leaders with the appropriate
knowledge base to approach a given geographic market. There are differences in strategies and
approaches in every geographic location worldwide and attracting talented managers with high
intercultural competence is a critical step in developing an efficient global strategy.
 Managing International Corporations

Considerations of Global Managers

 

As multinational corporations grow in both size and quantity, the inherent managerial
implications of a fully globalized economy demonstrate higher levels of relevance and importance
within global corporations. The development of global management skills, as well as the
intercultural competence to identify and develop sensitivity to cultural issues, becomes a larger
factor in the overall success of these business models.
 
Cultural Intelligence
 
Global management skills are largely based in developing cultural intelligence, or a high
cultural quotient (CQ), which delineates an individual’s general understanding and adaptability of
foreign cultures. This is best achieved through understanding what constitutes a high level of
intercultural competence and leveraging this confidence to achieve the desire results in global
management (see Boundless “Cultural Intelligence” section).
 Managing International Corporations
Localization
 
Once managers attain the
appropriate levels of
cultural intelligence, it
becomes necessary to
apply this to the
corporate framework.
Global management
requires a high level of
corporate strategy to
effectively implement, as
not only is the workforce Change in GDP: This graph shows growth in gross domestic
product in various advanced economies, accumulated over the
developing in diversity
periods 1990–1999 and 1990-2006. China shows the most
but so is the customer notable change in GDP, from 125% growth over 1990–1999 to
base. 325% growth over 1990–2006. India, Ireland, Korea, and
Singapore show substantial respective increases from around
50% growth to around 150% growth.
ANY QUESTIONS?
Activity
• Makea research about a local Filipino brands that are
successful globally thru Franchising. Give the full
background of the business.