International Business by Daniels and Radebaugh Chapter 1

International Business by Daniels and Radebaugh Chapter 1 International Business: An Overview 1

Objectives To define internal business (IB) and describe how it differs from domestic business To explain why companies engage in IB and why its growth has accelerated To introduce different modes a company can use to accomplish its global objectives To illustrate the role social science disciplines play in understanding the environment of IB To provide an overview of the primary patterns for companies’ international expansion To describe the major countervailing forces that affect IB 2

Introduction to International Business (IB) IB—all commercial transactions between two or more countries • Involves modes of business that differ from those at the domestic level • Foreign conditions diversity company’s external environment Why Companies Engage in IB Expand sales—greater purchasing power in the world as a whole Acquire resources—products, services, components • also, foreign capital, technologies, information Diversify sources of sales and supplies—takes advantage of business cycle differences among countries Minimize competitive risk—prevent competitor from gaining advantages 3

International Business: Operations and Influences OPERATIONS EXTERNAL INFLUENCES PHYSICAL AND SOCIETAL FACTORS • Political policies and legal practices • Cultural factors • Economic forces • Geographical influences COMPETITIVE ENVIRONMENT • Major advantage in price, marketing, innovation, or other factors • Number and comparative capabilities of competitors • Competitive differences by country OBJECTIVES • Sales expansion • Resource acquisition • Diversification • Competitive risk minimization STRATEGY MEANS Modes • Importing and exporting • Tourism and transportation • Licensing and franchising • Turnkey operations • Management contracts • Direct and portfolio investment Functions • Marketing • Production • Accounting • Finance • Human resources Overlaying Alternatives • Choice of countries • Organization and control mechanisms 4

Reasons for Growth of IB Expansion of technology—transportation and communication are quicker and less costly Liberalization of cross-border movements • Government barriers reduced because: – desire for better access to greater variety of goods and services – domestic producers forced to be more competitive – lowered trade barriers to their own exports Development of supporting services by business and governments to: • Ease the flow of goods and services sold abroad • Reduce risks of IB Increase in global competition—firms have become more global to maintain competitiveness 5

Means of Carrying Out International Operations OPERATIONS EXTERNAL INFLUENCES OBJECTIVES PHYSICAL AND SOCIETAL FACTORS STRATEGY MEANS COMPETITIVE ENVIRONMENT Modes • Importing and exporting • Tourism and transportation • Licensing and franchising • Turnkey operations • Management contracts • Direct and portfolio investment Functions • Marketing • Production • Accounting • Finance • Human resources Overlaying Alternatives • Choice of countries • Organization and control mechanisms 6

Modes of IB Merchandise exports and imports—most common international economic transaction, especially for smaller companies • Major source of international revenue and expenditures for most companies Service exports and imports—nonproduct international earnings • Tourism and transportation • Performance of services for a fee – turnkey operations – management contracts • Use of assets by others—licensing agreements – royalties – Franchising—franchisor: » allows franchisee to use trademark » provides components, technology, services 7

Modes of IB (cont. ) Investments—ownership of foreign property in exchange for financial return • Foreign direct investment—investor gains a controlling interest in foreign company – joint venture – mixed venture • Portfolio investment—noncontrolling interest International Companies—terminology Strategic alliance—collaborative arrangement of critical importance to the competitive viability of one or more partners Multinational enterprise (MNE)—company with global approach to foreign markets and production Globally integrated company—integrates operations located in different countries Multidomestic company—foreign-country operations act fairly independently 8

Physical and Societal Influences on International Business EXTERNAL INFLUENCES OPERATIONS PHYSICAL AND SOCIETAL FACTORS • Political policies and legal practices • Cultural factors • Economic forces • Geographical influences OBJECTIVES STRATEGY COMPETITIVE ENVIRONMENT MEANS 9

External Influences on IB Physical and societal factors—must understand • Politics that affect whether and how IB occurs • Domestic and international law determines what managers can do in IB • Economics • Geography—determine location and availability of world’s resources Competitive environment • Varies by industry, company, and country – strategies differ across companies » e. g. , importance of controlling labor costs » e. g. , influence of local and international competitors – size of market differs across countries 10

Competitive Environment and International Business EXTERNAL INFLUENCES PHYSICAL AND SOCIETAL FACTORS COMPETITIVE ENVIRONMENT • Major advantage in price, marketing, innovation, or other factors • Number and comparative capabilities of competitors • Competitive differences by country OPERATIONS OBJECTIVES STRATEGY MEANS 11

Evolution of Strategy in International Process Risk minimization—foreign operations viewed as risky international commitments evolve gradually Patterns of expansion • Passive to active pursuit of IB opportunities – initially wait foreign opportunity • External to internal handling of IB – rely on intermediaries at first • Limited to extensive modes of operations – begin with importing or exporting operation • Few to many foreign locations • Similar to dissimilar business environments Leapfrogging of expansion—new companies begin with international focus • Possible because of founder’s experience and technological advances that help define foreign markets 12

The Usual Pattern of Internationalism Impetus for international A business HIGH Active search for opportunities MEDIUM Passive response to proposals Moderately similar E Degree of similarity between foreign and domestic countries Internal versus external handling of foreign operations B Very dissimilar LOW Domestic Business Quite similar One Several Many D Company handles its own foreign operations Other firms handle external contracts Limited foreign functions, usually export/ import Limited foreign production and multiple functions Mode of operations Extensive C production abroad with FDI and all functions Number of foreign countries in which a firm does business 13

Countervailing Forces—complicate decision making Global standards—export suited to many countries – results in economies of scale – based on global strategy Nationally responsive practices—adjust product or service to unique local conditions – multidomestic approach advisable Country versus company competitiveness • Companies compete by seeking maximum efficiency on a global scale • Countries compete with each other to attain economic, political, and social goals – no consensus on measures of goal attainment • Relationship unclear between country and company performance – high-value activities—produce high profits or performed by well-paid employees 14

Countervailing Forces (cont. ) Sovereignty—freedom from external control • Countries will cede in order to: – gain reciprocal advantages » bilateral or multilateral commercial treaties or agreements – attack problems that cannot be solved by a single country » problem is too big or widespread » problem results from conditions that spill over from another country – deal with areas of concern that lie outside the territory of all countries (noncoastal areas of the ocean, outer space, Antarctica) » technologically advanced countries believe that companies should reap benefits from exploitation » other countries want to share the spoils 15