Chap001.ppt

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The Rapid Change of The Rapid Change of International BusinessInternational Business

Chapter One

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

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Learning Objectives For Learning Objectives For Chapter 1Chapter 1

Understand the many different types of International Business & how I.B differs from Domestic business

Understand the Theory of Globalization and its major drivers

Be able to explain the forces impacting the rapid growth of International Business

Define the external and Internal forces affecting the environment of International business

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International Business TerminologyInternational Business Terminology

International business terms Foreign business Multidomestic company (MDC) Global company (GC) International company (IC) Transnational company

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International Business A business whose activities are carried out across

national borders Foreign Business

The operations of a company outside its home or domestic market

Multidomestic Company An organization with affiliates in many countries

Each formulates its own business strategy Strategy based on perceived differences in

markets

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Global Company

Attempts to standardize and integrate operations worldwide in most or all functional areas

Transnational Company

A company trying to build Economies of Scale but also responds to local market needs

International Company

Denotes a global or multidomestic company

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History of History of International BusinessInternational Business

Early traders Early BC Mesopotamian, Phoenician and Greek merchants China stimulated the emergence of an internationally

integrated trading system “all roads lead to China”

Ottoman Empire(1299-13th century to WWI) 17th Century mercantilism/colonialism

British East India Company Dutch East India Company Portugal and France

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History of International Business

Mercantilism: A belief that a Country’s Wealth depends on accumulated treasure (ex. Gold)

Adam Smith argued against this theory with his

“Absolute Advantage Theory”

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GlobalizationGlobalization

The world economic globalization process Theodore Levitt’s (1983) view--now seen as

simplistic: Tech advances altered communication,

transportation, travel to create a global consumer who prefers standardized products

“The entire world [or major regions of it] is now a single entity; an organization can sell the same things in the same way everywhere”

Economic Globalization (working on functions) International integration of goods, technology,

information, labor, and capital The process of making this integration happen

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Globalization’s Outcome: GlobalityGlobalization’s Outcome: Globality

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Globalization ForcesGlobalization Forces

Five Major Globalization Drivers Political forces that

reduce barriers to trade and foreign investment by governments (NAFTA, E.U)

privatization of former communist nations Technological forces that

lead to advances in computers and communications technology

Internet and Network computing

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Market forces lead to globalizing companies’ need for their suppliers to

globalize too Globalizing companies become global customers

Cost forces Goal for economies of scale -- product line and

manufacturing -- to reduce unit costs lower cost production factor seeking efforts in other countries

Competitive forces more intense due to explosive growth internationally of small

and new businesses

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Rapid Growth of Rapid Growth of International BusinessInternational Business

The rapid growth of international business is a result of dramatic increases of foreign direct investment (FDI)

and exports FDI: A firm invests in equipment, structures, and

organizations in another country while retaining significant management control

level sufficient to obtain significant management control (Table 1.2)

Exports: Sale and transfer of any good or service from the firm’s home country to another country

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Explosive Growth

Number of International Companies- UNCTAD: United Nations agency in charge of all matters relating to FDI and international corporations.

In 1995- 45,000 parent companies with 280,000 foreign affiliates ($7 trillion in sales)

In 2004- 70,000 parent companies with 690,000 foreign affiliates ($19 trillion in sales)

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Environment of Environment of International Business International Business

Two sets of forces in the IB environment influence the development and operations of a firm External Forces (Uncontrollable)

Those that management cannot control Internal Forces (Controllable)

Those that management can develop and use to formulate and execute the firm’s strategy given particular external forces

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External Forces External Forces

External Forces: Uncontrollable Management has no “Direct” control, however they can influence them.

1. Competitive Competitor kinds, number, locations, activities

2. Distributive For distribute goods and services

3. Economic GNP, unit labor cost, and personal consumption

expenditures that matter to business and vary among countries

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External ForcesExternal Forces

4. Socioeconomic Characteristics and distribution of human

population5. Financial

Interest rates, inflation rates, and taxation6. Legal

Foreign, domestic, and international laws governing a firm’s IB operations

7. Physical Natural elements: natural resources (i.e.,

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External ForcesExternal Forces

8. Political Government forms, international organizations

9. Sociocultural National culture similarities or differences that

affect international managers

10. Labor Composition, skills, attitudes of labor

11. Technological Technical skills and equipment that affect how

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Internal Environmental ForcesInternal Environmental Forces

Controllable Forces Factors of production

Capital, raw materials, people Activities of the organization

Personnel management, finance, production, marketing

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Why Is IB Different?Why Is IB Different? In international Business we must manage both the

Domestic and Foreign environment, hence international business is much more complex. Domestic environment - uncontrollable forces

Has forces that surround and influence the firm’s behavior in the home country

These remain mostly the same regardless of where in the country the firm operates

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Why Is IB Different?Why Is IB Different?

Foreign environment country-by-country uncontrollable forces influence the firm’s behavior and are

different from those of the domestic environment based on values that differ difficult to assess for the firm’s home managers Interrelated

“Self –Reference” Criterion: the unconscious reference to one’s own cultural values- when Judging other nations (or people in a different environment)

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Why Is IB Different?Why Is IB Different?

The international environment is characterized by interaction between domestic and foreign country

environmental forces among foreign country environmental forces

Hence, decision making is more complex due to environment force differences and interactions culture differences that are difficult to learn the tendency of manager’s to rely on their own

culture’s reference points

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Globalization Debate Globalization Debate Supporting Free Trade Supporting Free Trade

Free trade enhances

socioeconomic development

promotes more and better jobs

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Concerns With GlobalizationConcerns With Globalization

Produces uneven results across nations and people Has deleterious effects on labor and labor standards Contributes to the decline of environmental and

health conditions

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