International Business – Midterm Review

AFM 333 Midterm Review Module 1: - Fall of Berlin Wall 1989 - Two Trends altering global market: globalization of markets and technological advances - Globalization: interconnectedness of national economies, growing interdependence of buyers, producers and suppliers in different countries G6 economies: US, UK, Japan, Germany, France, Italy - Account for half of global consumption with only 1/10 of population -

B6 economies: China, India, Russia, Brazil, Mexico, South Korea - China is the biggest market for phones, TVs, and cars in 2007 - China and India have more middle class households than all of the households in the United States - Growth in B6 more than 3x the growth in G6 economies 62 Multinationals in Fortune Global 500 20 of these multinationals are in China 12 from South Korea 6 from India 5 from Mexico and 5 from Russia B6 have three times the labour force of G6 countries 33 million university-educated young professionals in developing world compared to 14 million in the developed world 00 000 IT Engineers in India vs. 50 K in US In the decade to 2020, the working-age population of emerging economies is expected to increase by more than 500 million, compared with an increase of only 3. 7 million in developed economies. Drivers of Market Globalization - 1. Reduction of trade and investment barriers - 2. Market Liberalization: move to market based economies + adopt free trade in China + Soviet Union etc. - 3. Industrialization + Modernization + developing economies creating higher value adding products - 4.

Integration of World Financial Markets: international banks, globalization of finance - 5. Advances in Technology: reduces cost and time, improves coordination and communication, facilitates development, helps share information/marketing, virtual space removes distance Dimensions of Market Globalization - integration/interdependence of global economies - increase regional economic integration bloc - growth of global investment - convergence of buyer lifestyles/preferences - globalization of production activities Social Concequences - loss of national soverignity offshoring/outsourcing jobs - effects on the poor, the natural environment and national culture Firm-level consequences - new business opportunities - new risks and rivalries - more demanding buyers (less bargaining power to supplier) - international value chains Phases of Globalization 1. 1830-1880: Introduction of railway and ocean transport (trains and ships) + phone and telegraph invented 2. 1900-1930: increased steel and electricity production + Western Europe most industrialized country so established first multinational subs through colonization (Nestle, Shell, BP) 3. 948-1970: Form general agreement on tariff and trade + high demand for consumer products and input goods to rebuild after the war 4. 1980- now: radical advances in IT, communication, manufacturing, consultation, and privatization. Caused by: •Commercialization of the personal computer. •Arrival of the Internet and the web browser. •Advances in communication and manufacturing technologies. •Collapse of the Soviet Union and ensuing market liberalization in central and Eastern Europe. •Substantial industrialization and modernization efforts of the East Asian economies including China.

GDP growth rates highest in developing economies who emphasize global integration Information travels faster now than ever before (ships/carraiges, steamships/cars, motor vehicles/aircraft, internet (speed of light)). Firm Level Consequences of Globalization - international value chain - demanding buyers - increased rivalry and competition - increased opportunity for business - Management must change focus - Must partner and outsource better - look for productivity and operational efficiency gains - find and measure key global strategic assets of org. International Business trade and investment activities of firms across borders Globalization - economic integration and growing interdependency worldwide Theories of Trade - mercantilism – national prosperity = positive balance of trade (trade surplus) - absolute advantage principle – produce only products for which your country/region has an absolute advantage - comparative advantage principle – both countries produce even if one has absolute advantage in all products, relative efficiency matters, specialize in what you produce best and trade for the rest you can use scarce resources more efficiently

National Comparative Advantages - China low cost labour - India – IT workers in Bangalore - Ireland – service economy - Dubai – knowledge based economy Comparative Advantage = superior features with unique benefits in global market either naturally endowed or put in place through national policy - NATIONAL Competitive Advantage = distinctive competencies of a firm from cost, size, innovation that are difficult for competitors to replicate – FIRM Factor Proportions/Endowments Theory = produce and export products that use abundant factors of production and import goods that use scarce resources

Limitations of Early Trade Theories - they don’t account for cost of international transportation - tariffs and import restrictions distort trade flows - economies of scale bring about additional efficiencies - low cost capital now available on global markets How do Nations Enhance Competitive Advantage - governments can proactively implement policies to subsidize and stimulate the economy outside of natural endowments - create national economic advantage through: innovation stimulus, target industries for development, provide incentives and low cost capital

National Industrial Policy - economic development plan by public sector to nurture and support promising industries through: tax incentives, monetary/fiscal policy, rigorous educational systems, investment in national infrastructure, strong legal and regulatory systems - Example Ireland: fiscal, monetary and tax consolidation, partnership of gov with unions, emphasis on high value add industry like pharma, biotech and IT, membership in EU, investment in education - improved GDP, Unemployment and National Debt 3x by 2003 from 1987 Porter’s Diamond Model: Firm Strategy, Structure and Rivalry – strong competitors in country serves as national competitive advantage - clusters ? Factor Conditions – labour, natural resources, capital, technology, knowledge and entrepreneurship ? Demand Conditions – strengths and sophistication of consumer demand ? Related and Supporting Industries – availability of clusters and complementary firms in the value chain Industrial Clusters: - concentration of suppliers and supporting firms in the same regional area - ex. silicon valley, Switzerland pharma, fashion in italy/paris, IT in Bangalore - export platform for the nation

Classical Theories - International Product Cycle Theory: introduction, growth and maturity of each product and its associated manufacturing - INTRO: inventor country enjoys a monopoly in manufacturing and exports - GROWTH: other countries enter the global market place with more standard manufacturing - MATURITY: original innovator becomes net importer of product - Now – hard for innovator to maintain a lead because there is a short product life cycle - New Trade Theory: economies of scale important for international performance in some industries.

Ex. high fixed costs = high volume sales to breakeven Reasons to Invest Abroad: - market seeking - efficiency/cost seeking - resource seeking - knowledge seeking Why Internationalize? 1. opp for growth through diversification of market 2. higher profit margins 3. new P&S ideas and business methods 4. serve customers who have relocated abroad (increase/maintain market) 5. closer to supply sources, use global sourcing advantages, flexibility in sourcing products 6. access to lower cost/better value factors of production 7. evelop economies of scale in sourcing, production, marketing, economies of scale 8. confront international competitors 9. invest in relationship with a foreign partner Nature of International Business - value adding activities can be done internationally (source, manufacture, market) - cross border trade not limited to raw materials, include capital, tech, knowledge, products, services etc. - Internationalize through: Export, FDI, Licence, Franchise and JV FDI – longterm acquisition of productive assets like capital, tech, labour P&E etc - large commitment used to manufacture products in low labour cost countries MNE – big company with lots of resources, subs and affiliates in many countries (US, Japan, Germany, France, Britain) SME – small to medium size enterprise, 500 or fewer employees Born Global Firm – young company that initiates business on the global market Risks in International Business: 1. Commercial Risk – weak partnerships, bad timing of entry, high competition, poor execution of strategy, operational problems 2.

Currency Risk - tax, inflation, asset valuation, transfer pricing, currency exposure 3. Country Risk – protectionism/gov intervention, bureaucracy, lack of legal safeguards/poor leagal system, social/political unrest 4. Cross-Cultural Risk – cultural differences, negotiation, different decision making styles, different ethical practices MNE Avenues for Involvement: ? Import/Export ? Licencing/Franchising ? Joing Venture ? FDI - get progressively more risky, higher investment, higher potential benefit, higher commitment

Intermediaries Include: - Distributor – extension of firm, takes goods under their name to sell - Manufacturer Rep – under contract of exporter to rep and sell merch - Retailer – bypass wholesaler/distributer and sell to retailer to sell to customers – IKEA, WALMART - Trading Company – based in home country, high volume, low margin resellers. - Export Management Company – US, export agent who secures contracts to export goods – usually specialize in industries and areas - Agent – works on commission Licensor - Focal firm grants the right to the foreign partner to use certain intellectual property in exchange for royalties - Franchisor – grant right to use a business system for fees and royalties - ICV – share cost and risk fo new venture with another company - JV – create a jointly owned new entitiy with foreign partners - Project Based Venture – collaboration with a timeline without creating a new entity, common with R&D intensive ventures Facilitator – provide services for cross border transactions: Bank, Lawyers, Freight, Consultants, ad agency, custom brokers, insurance companies, tax accountants,

Turnkey Contractor: Provide engineering, design, and architectural services in the construction of airports, hospitals, oil refineries, and other types of infrastructure. •These projects are typically awarded on the basis of open bidding by the sponsor. •Examples- European Channel Tunnel, the Three Gorges Dam in China, Delhi Metro Rail Ltd. and the Hong Kong Airport. •Build-own-transfer venture- an increasingly popular type of turnkey contract in the developing economies where contractors acquire an ownership in the facility for a period of time until it is turned over to the client.

MODULE 3 [pic] Advanced economies are post-industrial countries characterized by high per capita income, highly competitive industries, and well-developed commercial infrastructure. •Examples- world’s richest countries and include Australia, Canada, Japan, New Zealand, the United States, and Western European countries. Developing economies are low-income countries characterized by limited industrialization and stagnant economies. •Examples- low-income countries, with limited industrialization and stagnant economies- e. g. Bangladesh, Nicaragua and Zaire.

Emerging market economies are a subset of former developing economies that have achieved substantial industrialization, modernization, improved living standards and remarkable economic growth. •Examples- some 27 countries in East and South Asia, Latin America, Middle East and Eastern Europe- including Brazil, Russia, India, China (so called BRIC countries). [pic] Advanced Economies – 2 - 4% growth rates - mature industrial development - moved from manufacturing to service based economies - typically democratic political systems and capital economic systems - host worlds biggest MNEs - Emerging Economies – 7 – 10% growth rates 40% of world GDP - 30% of exports - 20% of FDI - low cost labour and capital, knowledgeable workers, gov support - fastest growth rate - attractive: growing middle class, manufacturing bases, sourcing destinations - market potential: percapita income, size of middle class, GNI, use adjusted GDP for PPP - middle class has some economic independence and discretionary income Hong Kong, Isreal, Saudi Arabia The EMPI combines factors that provide firms with a realistic measure of export market potential: •Market Size: the country’s population, especially urban population •Market Growth Rate: the country’s real GDP growth rate Market Intensity: private consumption and GNI represent discretionary expenditures of citizens •Market Consumption Capacity: The percentage share of income held by the country’s middle class •Commercial Infrastructure: characteristics such as number of mobile phone subscribers, density of telephone lines, number of PCs, density of paved roads, and population per retail outlet •Economic Freedom: the degree of government intervention •Market Receptivity: the particular country’s inclination to trade with the exporter’s country as estimated by the volume of imports •Country Risk: the degree of political risk

Challenges of doing business with Ems - political stability – hard to forecast in uncertain conditions - beauraucracy/lack of transparency - weak IP rights - availability of good partners - presence of family conglomerates •Regional economic integration, refers to the growing economic interdependence that results when countries within a geographic region form an alliance aimed at reducing barriers to trade and investment. •40% of world trade today is under some bloc preferential trade agreement. Premise- mutual advantages for cooperating nations within a common geography, history, culture, language, economics, and/or politics •Free trade that results from economic integration helps nations attain higher living standards by encouraging specialization, lower prices, greater choices, increased productivity, and more efficient use of resources. 1. Market access. Tariffs and most non-tariff barriers have been eliminated for trade in products and services, and rules of origin favor manufacturing that uses parts and other inputs produced in the EU. . Common market. The EU removed barriers to the cross-national movement of production factors—labor, capital, and technology. 3. Trade rules. The member countries have largely eliminated customs procedures and regulations, which streamlines transportation and logistics within Europe. 4. Standards harmonization. The EU is harmonizing technical standards, regulations, and enforcement procedures that relate to products, services, and commercial activities. 5. Common fiscal, monetary, taxation, and social welfare policies in the long run.

The euro (common currency since 2002): •Simplified the process of cross-border trade and enhanced Europe’s international competitiveness. •Eliminated exchange rate risk in much of the bloc and forced member countries to improve their fiscal and monetary policies. •Unified consumers and businesses to think of Europe as a single market •Forced national governments to relinquish monetary power to the European Central Bank, in Luxembourg, which oversees EU monetary functions. •NAFTA passage (1994) was facilitated by the maquiladora program - U. S. firms locate manufacturing facilities just south of the U. S. order and access low-cost labor without having to pay significant tariffs. NAFTA has: •Eliminated tariffs and most nontariff barriers for products/services. •Initiated bidding for government contracts by member country firms •Established trade rules and uniform customs procedures. •Prohibited standards/technical regulations to be used as trade barriers. •Instituted rules for investment and intellectual property rights. •Provided for dispute settlement for investment, unfair pricing, labor issues, and the environment. •Trade among the members has more than tripled and now exceeds $1 trillion per year. In the early 1980s, Mexico’s tariffs averaged 100% and gradually disappeared under NAFTA. •Member countries now trade more with each other than with former trading partners outside the NAFTA zone. •Both Canada and Mexico now have some 80% of their trade with, and 60% of their FDI stocks in the United States. •Mexican exports to the U. S. grew from $50 billion to over $160 billion per year. •Access to Canada and the U. S. helped launch numerous Mexican firms in industries such as electronics, automobiles, textiles, medical products, and services. •Annual U. S. nd Canadian investment in Mexico rose from $4 billion in 1993 to nearly $20 billion by 2006. •Mexico’s per capita income rose to about $11,000 in 2007, making Mexico the wealthiest country in Latin America. •By increasing Mexico’s attractiveness as a manufacturing location, firms like Gap Inc. and Liz Claiborne moved their factories from Asia to Mexico during the 1990s. •IBM shifted much of its production of computer parts from Singapore to Mexico. ASEAN – Brunei, Cambodia, Indonesia, Laos, Malaysia APEC – Asia Pacific Economic Coop – Australia, Canada, Chile, US, China, Japan, Mexico CER – Aussie and New Zealand – removed 80% of tarriffs

Why Nations Expand? 1. Expand market size §Regional integration greatly increases the scale of the marketplace for firms inside the economic bloc. §Example- Belgium has a population of just 10 million; the EU gives Belgian firms easier access to a total market of roughly 490 million. 2. Achieve scale economies and enhanced productivity §Expansion of market size within an economic bloc gives member country firms the opportunity to gain economies of scale in production and marketing. §Internationalization inside the bloc helps firms learn to compete more effectively outside the bloc as well. Labor and other inputs are allocated more efficiently among the member countries- leading to lower prices for consumers. 3. Attract direct investment from outside the bloc §Compared to investing in stand-alone countries, foreign firms prefer to invest in countries that are part of an economic bloc as they receive preferential treatment for exports to other member countries. §Examples- General Mills, Samsung, and Tata- have invested heavily in the EU to take advantage of Europe's economic integration. §By establishing operations in a single EU country, these firms gain free trade access to the entire EU market. 4.

Acquire stronger defensive and political posture §Provide member countries with a stronger defensive posture relative to other nations and world regions- this was one of the motives for the initial creation of the European Community (precursor to the EU). •The value chain can be thought of as the complete business system of the focal firm. It comprises all of the activities that the focal firm performs. •The focal firm may retain core activities such as production and marketing, and outsource distribution and customer service responsibilities to foreign-market based distributors, thus the global reconfiguration of the value chain. Dell makes a variety of products, each with its own value chain. The total supply chain for a notebook computer, including multiple tiers of suppliers, involves about 400 companies, primarily in Asia, but also in Europe and the Americas. •On a typical day, Dell processes orders for 150,000 computers, which are distributed to customers around the world, with non-U. S. sales accounting for 40 percent. •Shipping is handled via air transport, e. g. from the Dell Malaysia factory to the U. S. Dell charters a China Airlines 747 hat flies to Nashville, Tennessee six days a week, with each jet carries 25,000 Dell notebooks that weigh a total of 110,000 kilograms, or 242,500 pounds. •One of the hallmarks of Dell’s value chain is collaboration. CEO Michael Dell and his team constantly work with their suppliers to make process improvements in Dell’s value chain. [pic] Automotive Industry •Manufacturing of the Chevrolet Malibu illustrates national and geographic diversity of suppliers that provide content for an automobile, a truly global value chain. •Suppliers are headquartered in Germany, Japan, France, Korea, and United Kingdom, and the U.

S. , and the components they sell to General Motors are manufactured in typically low-cost countries and then shipped to the General Motors plant in Fairfax, Kansas. •The German automaker BMW employs 70,000 factory personnel at 23 sites in 13 countries to manufacture its vehicles. •Workers at the Munich plant build the BMW 3 Series and supply engines and key body components to other BMW factories abroad. •In the U. S. , BMW has a plant in South Carolina, which makes over 500 vehicles daily for the world market. •In Northeast China, BMW makes cars in a joint venture with Brilliance China Automotive Holdings Ltd. In India, BMW has a manufacturing presence to serve the needs of the rapidly growing South Asia market. •BMW must configure sourcing at the best locations worldwide, in order to minimize costs (e. g. , by producing in China), access skilled personnel (by producing in Germany), remain close to key markets (by producing in China, India and the U. S. ). •Global sourcing is the procurement of products or services from suppliers or company-owned subsidiaries located abroad for consumption in the home country or a third country. Technological advances, including instant Internet connectivity and broadband availability TECHNOLOGY •Declining communication and transportation costs •Widespread access to vast information including growing connectivity between suppliers and the customers that they serve; and SUPPLY CHAIN •Entrepreneurship and rapid economic transformation in emerging markets. GLOBALIZATION •Managers must decide between internalization and externalization -- whether each value-adding activity should be conducted in-house or by an independent supplier. This is known as the ‘make or buy’ decision: “Should we make a product or conduct a particular value-chain activity ourselves, or should we source it from an outside contractor? ” •Firms usually internalize those value-chain activities they consider a part of their core competence, or which involve the use of proprietary knowledge and trade secrets that they want to control. •Configuration of value-adding activity: The pattern or geographic arrangement of locations where the firm carries out value-chain activities. Instead of concentrating value-adding activities in the home country, many firms configure these activities across the world to save money, reduce delivery time, access factors of production, and extract maximal advantages relative to competitors. •This helps explain the migration of traditional industries from Europe, Japan, and the U. S. to emerging markets in Asia, Latin America, and Eastern Europe. [pic] •Outsourcing refers to the procurement of selected value-adding activities, including production of intermediate goods or finished products, from independent suppliers. This practice of externalizing a particular value-adding activity to outside contractors is known as outsourcing. •Firms outsource because they generally are not superior at performing all primary and support activities. Most value-adding activities -- from manufacturing to marketing to after-sales service -- are candidates for outsourcing. •Business Process Outsourcing (BPO). The outsourcing of business functions to independent suppliers such as accounting, payroll, and human resource functions, IT services, customer service, and technical support. BPO includes: §Back-office activities, which includes internal, upstream business functions such as payroll and billing, and §Front-office activities, which includes downstream, customer-related services such as marketing or technical support. •Offshoring is a natural extension of global sourcing. It refers to the relocation of a business process or entire manufacturing facility to a foreign country. •MNEs are particularly active in shifting production facilities or business processes to foreign countries to enhance their competitive advantages. Offshoring is especially common in the service sector, including banking, software code writing, legal services, and customer-service activities. •E. g. , large legal hubs have emerged in India that provide services such as drafting contracts and patent applications, conducting research and negotiations, as well as performing paralegal work on behalf of Western clients. With lawyers in N. America and Europe costing $300 an hour or more, Indian firms can cut legal bills by 75 percent. Best Jobs for Offshoring: Large-scale manufacturing industries whose primary competitive advantage is efficiency and low cost; •Industries such as automobiles that have uniform customer needs and highly standardized processes in production and other value-chain activities; •Service industries that are highly labor intensive, e. g. , call centers and legal transcription; •Information-based industries whose functions and activities can be easily transmitted via the Internet, e. g. , accounting, billing, and payroll; and •Industries such as software preparation whose outputs are easy to codify and transmit over the Internet or by telephone, e. g. routine technical support and customer service activities. [pic] •Cost efficiency is the traditional rationale for sourcing abroad. The firm takes advantage of ‘labor arbitrage’ - the large wage gap between advanced economies and emerging markets. •One study found that firms expect to save an average of more than 40% off baseline costs as a result of offshoring. These savings tend to occur particularly in R&D, product design activities, and back-office operations such as accounting and data processing. Benefits of Outsourcing: •Faster corporate growth. •Access to qualified personnel abroad. •Improved productivity and service. Business process redesign. •Increased speed to market. •Access to new markets. •Technological flexibility. Improved agility by shedding unnecessary overhead. Disadvantages to Outsourcing: •Vulnerability to exchange rate fluctuations •Partner selection, qualification, and monitoring costs •Increased complexity of managing a worldwide network of production locations and partners •Complexity of managing global supply chain •Limited influence over the manufacturing processes of the supplier •Potential vulnerability to opportunistic behavior or actions in bad faith by suppliers •Constrained ability to safeguard intellectual assets

Risks in Global Sourcing: 1. Less-than-expected cost savings. Conflicts and misunderstandings arise because of differences in the national and organizational cultures between the focal firm and foreign supplier. Such factors give rise to cost-savings that are less than originally anticipated. 2. Environmental factors. Numerous environmental challenges confront focal firms including: exchange rate fluctuations, labor strikes, adverse macro-economic events, high tariffs and other trade barriers, and high energy and transportation costs. 3. Weak legal environment.

Many popular locations for global outsourcing have weak laws and enforcement regarding intellectual property, which can lead to erosion of key strategic assets. 4. Risk of creating competitors. As the focal firm shares its intellectual property and business-process knowledge with foreign suppliers, it also runs the risk of creating future rivals (e. g. , Schwinn). 5. Inadequate or low-skilled workers. Some foreign suppliers may be staffed by employees who lack appropriate knowledge about the tasks with which they are charged. Other suppliers suffer rapid turnover of skilled employees. 6. Over-reliance on suppliers.

Unreliable suppliers may put earlier work aside when they gain a more important client. Suppliers occasionally encounter financial difficulties or are acquired by other firms with different priorities and procedures. Over-reliance can shift control of key activities too much in favor of the supplier. 7. Erosion of morale and commitment among home-country employees. Global sourcing can create a situation in which employees are caught in the middle between their employer and their employer’s clients. At the extreme, workers find themselves in a psychological limbo, unclear about who their employer really is.