1. Lecture 1 Introduction

• This Course

• Structure

• Concepts

Background

• History of International Business

• • Trade and Investment

• Why Geography Matters

• • Market seeking and Resource seeking transactions

Current Dominant Factors

• World Class Operations

• Reductions in Trade Barriers

• Globally Connected Supply Chains

Break

Globalization and Employment

• Trade in Goods and Labor

International Operations (MGMT 6390) / International Business (MGMT 6350) 2. What This International Operations/ International Business Course is About

Business Strategy, Marketing

• What products and services to offer our customers

Finance

• Investments, Currency transactions, etc.

Operations

• Actually creating and delivering those products and services

InternationalTransactions

• For customers

• For input resources

• For service and production locations

• For knowledge

• For funding

Business 3. International Transactions

Trade

• Goods

• Services

Foreign Direct Investment (and other investment)

• Mergers and Acquisitions

• Joint Ventures

• Green Field Development

Technology Transfer

• Licensing

• Knowledge Diffusion

• R&D Services

Supply Chain Relationships

• Suppliers

• Sales channels

Facilitating Infrastructure

• International Transportation Links

• International Communication Links

4. Course Objectives

Gain a conceptual framework to:

• integrate and adapt superior operating practices and technologies from across the world for high performance operations.

• design global supply chains and manage risks of cross border business relationships

• establish world class manufacturing, service and R&D in developing countries

• assess globalization political and societal issues

• apply international business concepts to real business situations

Critical skills for successful careers in

• Large global companies

• • In the developed and developing world

• Small companies that buy, sell, and learn globally

• New ventures

• Government and Academia

5. Course Structure

General principles

• History and key concepts,productivity and facility location

• Global Supply chains and logistics

• High performance operations practices

Examples from specific countries

• US and Japan, Mexico, India, China, EU

Examples from specific firms and industries

• Albany International, Color Kinetics, Semiconductors, R&D Services

Strategic and Political Implications

6. Course Plan Logistics Management, Transportation and Communication 3 Project Reports14 Quest for Global Dominance, Globalization Backlash 13 Strategic and Political Implications Globalization of R&D 12 Semiconductors and Global Knowledge Networks 11 EU, Albany International 10 Industry Examples China, Color Kinetics 9 India 8 Mexico7 US and Japan 6 Country Examples World Class Operations, Global vs National Mindsets5 Productivity and Location Decisions 4 Global Supply Chains, Outsourcing and Offshoring 2 Introduction, History, Globalizaion and Jobs 1 General Principles Week 7. Cross Cutting Ideas

Tension (balance) between

• Transplantation

• vs

• Transformation

• • of business practices and company culture when establishing operations in different national environments

National mindset vs Global Brains

Market vs Resource Drivers

Deals and Partnerships

• Managing alliances and agreements

Knowledge Diffusion

Diverse Supply Chain Structures

• Modularization of production

Toyota in India Example 8. Course Requirements

Readings Library On-Line Reserves and Case Packs

• Participate in discussion boards in advance

Essay

• Analyze an article or do more depth on one of the readings. 5-10 pages

Project

• Strong preference:Work to solve a real problem with a company you or a team-mate have some access to

Grading

• Participation = 30% (discussion board and in-class contributions )

• Essay = 30%

• Project = 40%

9. Instructor Introductions

Richard Alben

Susan Sanderson

10. Student Contributions

Fill out a survey on your International Business experience

• Were you born and or educated outside the US?

• Did you do business internationally?Examples:

• • Owned a business in Thailand that imported parts from China and exported to Japan

• • Worked in a US company that exports to Europe

• • Working as a waiter in a caf in Paris

• Do you know people in the US or in countries outside the US who have interesting points of view on International Business?

11. Course Limitations

US viewpoint

• Professors come from US background.Hard to break out ofUS-centric view of what is happening inthe rest of the world

Leaves out important areas of the world

• Little on EU, the Former Soviet Union and the least developed countries

Only cover a few industries in any depth

• Appliances, Automobiles, Paper Machine supplies, Semiconductors, Flat Panel Displays, R&D services covered

• Financial services, health care, petroleum, government services etc, not covered

Your challenge:Expand the concepts in the course to cover the gaps. 12. History of International Business

Trade from ancient times until the late 1800s

From the late 1800s to before WWII

Dominance of the US (to 1970)

Globalization: Japan, the Asian Tigers, the EU and China

13. History of International Business

Trade from ancient times until the late 1800s

From the late 1800s to before WWII

Dominance of the US (to 1970)

Globalization: Japan, the Asian Tigers, the EU and China

14. Growth of Trade WTO and IMF and World Bank data Intra-EU trade in 2000 was 1.4T in 2000 Services was 20%, Merchandise was 80% in 2000 2004 data from a different series 27.0 10.06 37.3 2004 2000 1990 1980 1970 1960 1950 Year 21.7 7.88 36.3 15.1 4.30 28.5 12.2 2.54 20.8 2.7 0.39 14.3 2.0 0.17 8.6 1.6 0.09 5.4 Trade as a % of GDP World Trade (2000$ trillions) World GDP (2000$ trillions) 15. Growth of Foreign Direct Investment UNCTAD data 16. Globalization of Business Practices

Linked to globalization of companies

National companies with overseas operations

Multinational companies

Global companies

• With global brains

• But with national base

World businesses(?)

Diverse national cultures Global company culture Uniform home country culture 17. Why Does Geography Matter?

Resource availability varies with geographic location

• Mineral resources (oil, coal, gold, iron ore)

• Hydroelectric power

• Growing conditions (weather, soil)

• Land

• Labor High skills, low cost

• Infrastructure/clusters

• Social institutions, business ethics

Ability to serve customers varies with distance

• Transportation/communication costs

• Hair cuts

• Repair services

• Just in time components

• R&D for culture-dependent products and services

• Government incentives/disincentives

18. Market Seeking vs Resource Seeking International Operations

Examples

• Clear cases

• • Banana production in Nicaragua

• • Refrigerator Assembly in Mexico (vs the US)

• • GE Aircraft Engines joint venture with SNECMA

• • Toyota plant in Georgetown KY

• Mixed cases

• • Motorola Cell Phone production in China

• • Medical Equipment R&D in India

• Note:

• • Travel Services in Puhket Thailand, Oil field services in Saudi Arabia

• • Refrigerator Assembly in Mexico (vs China)

Implications

• Reduction of transportation, communication, regulation and worker skill barriers favors resource seeking vs market seeking

• A factor driving trade growth, but not necessarily FDI growth

19. Dominate Factors Today

World Class Operations

Reductions of Trade and Investment Barriers

Globally Connected Supply Chains

20. Operations Foundations ofGlobalization

Changes at the level of operations drove much of globalization

• International transaction costs driven down

• Production technology needs to compete with best-in-world

Innovations in Information and Communication and Transportation drive down transaction costs

• Port Automation, Inter-modal shipping technology

• Internet

• Global Supply chains

• Information enabled services

Innovations in Production technology and Management

• Total quality management and its relatives

• Adaptation for specific products and company cultures

• High performance and technology emerge in the developing world

21. Trade and Investment Barriers

Tariffs

• In past, were a major source of revenue to governments

• A major impediment to trade

Non-tariff issues

Trade agreements - WTO

22. Tariffs

Past

• Major source of revenue to governments

• Raised prices of imported good by 20% - 100%+

Present for US

• $20B/yr to USgovernment on $1T in imports (2000)

• • Average of 2% of import value (wholesale)

• Most Favored Nation, Normal Trade Relation rates:

• • Consumer electronics - 3.9%, Machine tools - 7%

• • Some agricultural goods and Clothing - ~25%

• Countries with Trade agreements

• • Many rates are 0%

Less developed world

• High tariffs remain

• • Protection

• • Revenue

23. Other Barriers

Quotas (Tariff Rate Quota)

• Textile (Multi-fiber agreement) example

Trigger Prices

Local Content Requirements

Off-sets

Technical standards, health and safety

• Can be used as screen for protectionism

National security

• Weapons and Dual Use Technologies

Local business ownership requirements

24. World Trade Organization

Established in 1995 after the Uruguay Round of trade negations

• Successor to GATT

• Administers WTO trade agreements, forum for trade negotiations and for resolving trade disputes

Principles

• without discrimination a country should not discriminate between its trading partners (giving them equally most-favored-nation or MFN status); and it should not discriminate between its own and foreign products, services or nationals (giving them national treatment);

• freer barriers coming down through negotiation;

• predictable foreign companies, investors and governments should be confident that trade barriers (including tariffs and non-tariff barriers) should not be raised arbitrarily; tariff rates and market-opening commitments are bound in the WTO;

• more competitive discouraging unfair practices such as export subsidies and dumping products at below cost to gain market share;

• more beneficial for less developed countries giving them more time to adjust, greater flexibility, and special privileges.

25. International Agreements on Bribery

US Foreign Corrupt Practices Act (FPCA)

• No payments by US companies to foreign officials for the purpose of obtaining business (1977)

• • Cant avoid it by using subsidiaries or intermediaries

• • Can get hit with treble damages from companies that lose business because of our bribe

• Exceptions

• • Facilitating payments

• • Where provably legal in the foreign country

Changed the game for US companies

Extended to most firms from other developed countries (1998)

• OECD Convention (ratified by 33 countries)

• US FPCA extended to apply to almost any firm doing business in the US

26. A Global Supply ChainFiber supplier in Australia Textile Maker in Italy Zipper Maker in China Apparel Maker in Mauritius Apparel Designer and Marketer in US Carriers andIntermediaries Carriers andIntermediaries Retailer in US

Question:How best to command a supply chain?

• Arms length transaction at every stage?

• Global coordination vertical integration?

Use of Intermediaries

• Laura Ashley Federal Express Case: Logistics Outsourcing

• Next time - Li and Fung Case:Supply Chain Outsourcing

Material flow Information flow Implies transport system details omitted 27. Trade in Goods and Labor 28. Trade in Beavers and Knives Europe 1 beaver = 3 knives North American Wilderness 3 beavers = 1 knifeStart Finish 29. Knife-Beaver Trade issues

Transaction costs

Distribution of Benefits

Dynamics

• exchange ratio equilibration

• cost pressures on facilitating factors

• technology and market changes

30. Trade in Labor US 1 labor hour = $22 China 1 labor hour = $0.60 Start Finish $ $$$$$ $ Unemployed worker Unemployed worker $$$$ 31. Labor Trade issues

Restriction on movement of people

Differences in productivity declining

• Requires Knowledge transfer

Increasing disparity between footloose and rooted jobs

• Equilibration of wages between countries

• Increasing income disparity within countries

Pain, but economic benefit to developed country GDP

• Creative Destruction, Like Productivity

Mainline opinion:major net positive effect for developing country

32. Median Salaries ($K/year) In IT India vs. US*

*India results from PayScale 2005

India IT wages up 14.5% vs 3% in US 2004

33. Professional Wages Business Week - Dec. 2005 34. Measure of Income Disparity % Households % GNI of lowest x% of households 0 100 100 0 Gini Coefficients:a = 0, b~0.4, c~0.6 a b c 35. Increasing Income Disparity in the US From Income Inequality in the United States By Steven C. Deller* URL: http://www.aae.wisc.edu/www/pub/cenews/ce308figures.pdf 36. Global R&D Resources I: Total Science and Engineering Doctoratesin Selected Asian Economies NSF Science Indicators 2004 appendix table 2-39 37. Global R&D Resources II: Total Science and Engineering Doctoratesincluding US and Germany NSF Science Indicators 2004 appendix table 2-39 and 2-37 38. Next Class

Global Supply Chains

• Readings:Modular production networks: a new American model of industrial organization, by Timothy Sturgeon

• Guest speaker: Tim Sturgeon

• Case: Li and Fung

39. Guidance for Case Discussion

Li and Fung

• Two major themes

• • How Li and Fung developed into a world class player in providing supply chain services

• • Technology advance requires that the company adapt.But how to adapt new information technologies in a way that provides value in both cost and enhanced service is an issue

• Some discussion points

• • What were the historic strengths that enabled Li and Fungs business to grow?What was the value they delivered?

• • What keeps an intermediary like Li and Fung from being squeezed between suppliers and retailers?

• • How is Li and Fung trying to adapt to advancing information technology?What advice would you give William Fung?

• Assignment

• • Prepare notes to hand in