Kim 3600 unit 1

The Nature of International Business

• all value-adding activities (including sourcing, manufacturing, and marketing ) can be performed in international locations.

What can international trade involve?

Products, services, capital, technology, know-how, and labor.

How do firms internationalize?

through various entry strategies, such as exporting and foreign direct investment (FDI)

Dimensions of International Business

• Globalization of markets

• International Trade

• International Investment

• International Business risks

• Participants (firms, intermediaries, facilitators, governments)

• Foreign Market Entry Strategies

International Business

Performance of trade and investment activities by firms across national borders

(MNE or MNC)

Globalization of Markets

ongoing economic integration and growing interdependency of countries worldwide

International Trade

Exchange of products and services across national borders, typically through exporting and importing

exporting

Sale of products or services to customers located abroad

Importing (or global sourcing)

procurement (to obtain) of products or services from suppliers located abroad for consumption in the home country or a third country

International investment

The transfer of assets to another country or the acquisition of assets in that country. Also known as 'foreign direct investment' (FDI), we will focus on this type of investment

International Portfolio investment

passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns

Leading countries in international merchandise trade by total annual value in $billions

1. China

2. US

3. Germany

4. Japan

5. France

Leading countries in international merchandise trade by % of GDP

1. Belgium

2. Netherlands

3. South Korea

4. Germany

5. Canada

Leading countries in international service trade by total annual value in $billions

1. US

2. China

3. Germany

4. UK

5. France

Leading countries in international service trade by % of GDP

1. Ireland

2. Singapore

3. Hong Kong (China)

4. Denmark

5. Netherlands

Types of IB risks

• cross-cultural risks

• country risks

• currency risks

• commercial risks

(always present but manageable; managers need to understand, anticipate, and take proactive action to reduce their effects; some risks are extremely challenging.)

Cross-Cultural risks

Cultural Differences: Risk arising from differences in language, lifestyle, attitudes, customs, and religion, where a cultural miscommunication jeopardizes a culturally-valued mindset or behavior.

Negotiation Patterns: Negotiations are required in many types of business transactions.

Decision-Making styles: managers make decisions continually on the operations and future direction of the firm

Ethical Practices: standards of right and wrong vary considerably around the world.

Country (political) risks

• government intervention, protectionism, and barriers to trade and investment

• bureaucracy, red tape, administrative delays, corruption

• lack of legal safeguards for intellectual property rights

• legislation unfavorable to foreign firms

• economic failures and mismanagement

• social and political unrest and instability

Currency (financial) risks

• Currency exposure: general risk of unfavorable exchange rate fluctuations

• Asset valuation: risk that exchange rate fluctuations will adversely affect the value of the firm's assets and liabilities.

• Foreign taxation: income, sales, and other taxes vary widely worldwide, with implications for company performance and profitability.

• Inflation: high inflation, common to many countries, complicates business planning, and the pricing of inputs and finished goods.

Commercial Risk

• weak partner

• operational problems

• timing of entry

• competitive intensity

• poor execution of strategy

Who participates in IB?

Multinational Enterprise (MNE): a large company with substantial resources and a network of subsidiaries and affiliates located in multiple countries (e.g. Caterpillar & Samsung)

Small and Medium-sized enterprise (SME): 500 or fewer employees & comprising over 90%V of all firms.

Born Global Firm: a young, entrepreneurial SME that undertakes substantial international business at or near its inception.

Non-governmental organizations: non-profit organizations pursue special causes and serve as advocates for social issues, education, politics, and research. (e.g. The Bill and Melinda Gates foundation, CARE)

Why firms participate in IB?

• seek opportunity for growth through market diversification (Harley- Davidson, IKEA, H&M)

• earn higher margins and profits

• gain new ideas about products, services, and business methods (GM makes small, fuel-efficient cars in Europe)

• serve key customers that relocated abroad (Toyota in Britain)

• be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products. (apple sources parts and components form the best suppliers worldwide)

• gain access to lower-cost or better-value factors of production (Sony manufacturing in china)

• develop economies of scale in sourcing, production, marketing, and R&D

• confront international competitors more effectively or thwart the growth of competition in the home market

• invest in a potentially rewarding relationship with a foreign partner

The need for global trade

• good for job creation

• bring in wide range of products & services to a country

• expand consumer choices

• exert pressure on domestic products to improve

• improve standard of living

• allows for economics of scale

• allows firms to hone their competitive skills abroad

Costs of IB (Global Business)

Critics say it increases the wealth of corporations and investors at the expense of the poor, and does other damage to society in general

• exporting jobs

• wage rates of unskilled workers in advanced countries

• countries - MNE dependent

• loss of control and sovereignty

Current US trade position

The US has an increasing trade deficit

• imports are increasing more rapidly than exports.

US trade relationships with major trade partners

Critical Issues facing the US:

• trade with the Pacific Rim, Japan, and China

• Trade with Canada and Mexico

• The continuous, long-term US trade deficit

Culture defined

Culture is an integrated system of learned behavior patterns that are characteristic of the members of any given society.