1

International Business

Prof. dr. Pieter Klaas Jagersma

2

1

Globalization: An Introduction

3

Headlines of international newspapers

“The Globalization of Markets .....” “A Global Trade War on the Way?” “Protectionist Pressures are Building .....” “Ads that celebrate the Global Product .....” “Multinationals Tackle Global Marketing .....” “Globalization: The Debate Goes on .....” “P&G’s Gamble on ‘Globalization’ .....” “Going Global in Europe .....” .....

4

Globalization - What’s in a name?

A step-by-step process of international business development whereby a firm becomes increasing- ly committed to and involved in international bu- siness operations through specific products in se- lected markets

Definition depending on the level to focus on

5

Globalization - What’s in a name? (2)

At a worldwide level .....

globalization refers to the growing economic in- terdependence among countries as reflected in increasing cross-border flows of goods, services, capital and know-how

6

Globalization - What’s in a name? (3)

At the level of a specific country .....

globalization refers to the extent of the interlinka- ges between a country’s economy and the rest of the world

Not all countries are equally integrated into the global economy

7

Globalization - What’s in a name? (4)

At the level of a specific industry .....

globalization refers to the degree to which a com- pany’s competitive position within that industry in one country is interdependent with that in another country

8

Globalization - What’s in a name? (5)

At the level of a specific company .....

globalization refers to the extent to which a com- pany has expanded its revenue and asset base ac- ross countries and engages in cross-border flows of capital, goods + know-how across subsidiaries

9

Conclusion

There is no universally accepted definition of glo- balization

Globalization is at the heart of the New World Economic Order

Globalization is here to stay

10

Globalization in perspective

According to the World Bank, the share in world output of multinational affiliates jumped from 4,5 per cent in 1970 to 15,5 per cent in 2000

The share in manufacturing output of multinatio- nal affiliates was 18 per cent in 1992 (26 percent in 2000), up from 12 per cent in 1977

Tariffs of developing countries are set to fall from 34 per cent between 1984 and 1987 to 14 per cent in 2003

11

Globalization in perspective (2)

Ratios of exports to global output were 9 per cent in 1913, 7 per cent in 1950, 11 per cent in 1973 and 16 per cent in the late 1990s

FDI flows grew at 12 percent a year between 1991 and 2002, while global exports grew at 6 per cent

In 2001, 30 per cent of total FDI went to develop- ing countries In 2001, 300.000 foreign affiliates generated US $ 10,000

billion in global sales

12

2

Global Industries

13

Global industries - What’s in a name?

Global industry =

an industry in which a competitive advantage is derived from the exploitation of scale/skills eco- nomies or comparative advantage across country boundaries within a centrally coordinated busi- ness system

14

Globalization of industries is the result of three major

structural changes

Rise and equalization of incomes across the indus- trialized countries

Growth of homogenous demand patterns as reflec- ted in similarity of tastes and standards among (OECD) countries

Secular decline in trade barriers among (OECD) countries, even though selective sector-specific restrictions continue to exist

15

Substantial rise and equalization of income levels across the industrialized countries

SwitzerlandU.S.A.NetherlandsJapanSingapore/Taiwan

S. Korea

Year1960 1970 2000

30

20

10

0

Source: UN National Accounts Yearbooks; OECD National Accounts

Comparativeper capita in-come ($ thou-sands)

16

The convergence of income levels has resulted in similar consumption levels

and demand patterns

17

The past decades have witnessed a secular decline in trade barriers

Barrier Trends Examples

Trade restrictions GATT negotiations Particularly effective among developed nations Preferential pur- Gradual relaxation For example, telecommunications market chasing policies and opening up of government markets Local content Continues to be im- Mexico and India have adopted more liberal policies portant; though most foreign investment regulations governments under- stand the need for companies to link their local operations as part of a global network National security Continues to be in- Greater willingness on part of countries such as policies voked as reason for France to accept participation of foreign firms protection in high tech and defense projects

18

Examples of non-tariff (trade) barriers

Voluntary export restraints Subsidies

19

Increasing interdependence among countries is

evident

Exports are increasing in importance .....

Exports as a percent of GDP (in EU, Japan and U.S.):

15 percent (in 1965) > 31 percent (in 2002)

Source: OECD National Accounts

20

World business is and will continue to be characterized by .....

Increasing interdependence among countries via trade and foreign direct investment (inter-industry trade/FDI)

Increasing interdependence and interpenetration within the same industry across countries (intra- industry trade/FDI)

21

FDI/Cross-border direct investment is a key feature

of global competition in many industries

Automobiles Aircraft Telecommunications Banking Management Consultancy Business Schools

From Goods toServices

22

Foreign direct investments (FDI) nature changed:

Typology

Global expansion vehicles 1970 1980 1990 1995 ‘00

Greenfield investments 89% 66% 47% 35% 21%

M&A 4% 25% 32% 36% 37%

Cooperative agreements 7% 9% 21% 29% 42%

Number of international expansions (European firms)

Source: Jagersma (2001)

Major increase in global M&A and (especially) global alliances

23

Japanese companies took the lead in globalizing industries

Share of world trade gained/lost 1970-1995

Global/emerging industries US Japan BRD

Motor vehicles lost (2%) won (20) lost (5) Machines, nonelectronic won (3) won (5) lost (10) Aircraft won (10) won (5) lost (5) Power machinery (nonelectric) lost (15) won (2) won (5) Office machines lost (5) won (18) lost (2) Automatic data processing lost (15) won (30) lost (5) Machinery for specialized industries won (20) won (20) lost (17) Telecommunications equipment won (5) won (8) lost (12) Electrical power machinery won (2) won (11) lost (12)

24

Share of world trade gained/lost 1970-1995 (2)

Global/emerging industries US Japan BRD

Sound recorders, phonographs lost (4%) won (18) lost (14) Woven textiles, man-made lost (2) won (15) lost (4) Iron/steel lost (2) won (11) lost (2) Plastic materials lost (1) won (9) won (3) Civil engineering equipment won (2) won (12) lost (7) Metalworking machines won (3) won (7) lost (2) Transistors and valves lost (20) won (17) lost (8) Electrical machinery won (2) won (8) lost (5)

Source: UN Yearbook on International Trade Statistics (1970-1995)

25

3

Global Strategy: An Introduction

26

Industries can be characterized on a spectrum Sources of sustainable competitive advantage

Local >>> Emerging >>> Global

Derived from Derived from worldwide country market management of business system (integration) - Scale/skills economies - Country comparative advantage (factor costs) - Centralization of stra- tegy and decentralization of stages of business sys- tem as economies and ef- ficiency dictate

27

Characteristics of industries

Local Global

Product market Wide variation in customer Homogenous buyer preferences preferences, standards worldwide Economics Limited scale/high adap- Large scale/low adap- tation costs tation costs Competition Major competitors are lo- Major competitors are cal competitors in each global even though country they may be weak in a particular country World consists of ...Largely separate markets Linked markets

28

Characteristics of industries (2)

Local Global

Role of global Competing globally Competing globally strategy optional vital

KFS Success comes from res- Competitive advanta- ponding to local conditions ge comes from global centralization/coordi- nation

29

Examples of local, emerging and global industries

Local Emerging Global

Cement Medical equipment Automobiles Brewing Scientific instruments Computers Soaps, detergents Optical goods Construction mach. Food processing Plastic materials Agricultural mach. Travel goods Measuring devices Pharmaceuticals Retailing Specialized machinery Television Housing Aircraft HR consultancy Strategic consultancy Retail banking Wholesale banking Investment banking et cetera

30

4

Global Businessmodels

31

Globalization of business enhances need to change

Multi-national approach >> Global/integrated approach (business units are stand- (business units are inter-

alone activities) linked activities)

Economies of scale (output)Economies of scope (input)Economies of skills

32

In many industries, competing globally is imperative

Industries Global competitors Non-global casualties

Aircraft Boeing, Airbus Lockheed, MDD Construction Caterpillar, Komatsu International Harvester equipment Autos Toyota, Ford, GM, VW British Leyland, DAF, Lada Semiconduc- Intel, NEC, Fujitsu tors Computers IBM, HP, Dell, Apple ICL, Tulip Pharma Merck, Novartis (almost Lots of small players all large players) Consumer Sony, Philips, Sharp, Grundig, AEG, RCA electronics Matsushita, B&O

33

Global strategy requirements of competing glo- bally differs from country-centered competi- tion (in multi-market industries/segments)

Country-centered strategy Global strategy (multi-market industries) (global markets/industries)

Portfolio of country subsidiaries Coordinated global system

Subsidiaries largely independent; evalua- Subsidiaries dependent on other ted as profit centers on local results units; evaluated on basis of con- (Deloitte&Touche) tribution to worldwide system

Competitive position based on in-country Competitiveness based both on factors; subsidiaries may follow varied systemwide strengths and in- strategies (KPMG) country factors; subsidiaries have roles within system

Power and authority are weighted towards Power and authority are shared country managers authority (PWC) among managers of business units and country managers

34

5

Globalization: A Dynamic Process

35

Industries take three basic routes to globalization

The traditional path of becoming global when mature: evolution

Major discontinuities or innovation: revolution “Born global”

36

Evolution paths1 = automobiles, color TV, construction equipment (evolution examples)2 = software, telecommunications (major discontinuities or innovation examples)3 = pharmaceuticals, large aircraft, robotics, large computers (born global examples)

Industries .....Source of

competitive advantage

Domestic Emerging/Multimarket Global

R&D

Manufac-turing

Marketingand distri-bution

1

3

2 3

1

Source: Jagersma (2000)

37

Main characteristic of market structure evolution during globalization: greater concentration (example: autoindustry)

1920 1995

+/- 255 players

+/- 25 players

38

..... and also a decline in average profitability

In percent

20

5

1950 1995

4,5 percent in 1995

39

6

Implications for Global Strategy

40

The essence of global strategy involves a firm’s deciding where

and how to perform each business system element

Each element of the industry chain has its own globalization logic (or not!!)

Three kinds of design configurations are possible for each business system element

Centralized activities: ‘centralized’ strategy Central coordination of geographically dispersed activities: ‘inter-

linked’ strategy Decentralized (differentiated) activities in each country: ‘stand-

alone’ strategy

41

Globalization may take different approaches in each stage of the

business system: Global R&D

Approach Rationale Example

One central location - Economies of scale Boeing aerospace labs in R&D in Seattle - Likely in country with clear lead in techno- logical infrastructure

Centrally coordinated, - Take advantage of unique Pharmaceutical compa- multiple locations skills or strengths avai- nies around the world lable in different country locations - Specialize labs by different products/technologies

42

Globalization may take different approaches in each stage of the business system: Global R&D

(2)

Approach Rationale Example

Same R&D in multiple - Draw on multiple scien- IBM (basic research locations tific perspectives on same labs in U.S. and Europe) problem - Avoid risk of being tied down to one approach

43

7

Generic Global Businessmodels

44

Global businessmodelsSource: Jagersma (2000)

Business profitability in one country independent of another

Profitability in one country depends on operations in other countries

Country Global niche

Regional Transnat.

National

Scope ofoptimumbusinesssystem

Global

High Low

Extent of local adaptation

Stand-alone

businesssystems

Singleregional/

worldwidebusinesssystems

45

8

Winners in Global Industries Play a Global Game

46

Many companies have to cope with these challenges .....

Actualstrategy

Country

Regional

Transnatio- nal

Country Regional Transnational

Required strategy

UnileverGENestleIKEA

IBM

Olivetti

Philips[Siemens]Chrysler

XeroxFord

BoeingCaterpillarToyotaSonyDaimler-Benz

47

Nature of global strategy challenge depends on the extent of misfit

Actualstrategy

Country

Regional

Transnational

Country Regional Transnational

Required strategy

Fundamental restructuringof business system

Significant investment andorganizational realignment

Difficult transition

Requires readaptation ofbusiness system and or-

ganizationIf not feasible, seek part-

nerships

Global strategy fit

Global strategy fit

Global strategy fitDecentralize, permitlocal differentiation

48

9

Take Aways

49

Take aways

World has entered a new era of global competition; funda- mental environmental forces (.....) will continue this deve- lopment

Winners in this/the next decade will be those with skills + fin. resources to play a global game; companies unable to attain global leadership must also adapt to minimize their disadvantages (.....)

There is no one pattern of global competition nor one type of global businessmodel (.....)

Globalization is here to stay: people want the best goods/ services, whatever their origin. Along with the right to vote they want the right to buy (.....)

50

International Success = Will + Skill

Thrill