Challenge 1: Context of IB

Value-adding Activities

sourcing, manufacturing, and marketing

Ways firms can internationalize

Exporting and foreign direct investment

Dimensions of Global 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

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, from a base in the home country or a third country

Importing or global sourcing

Procurement of products or services from suppliers located abroad for consumption in the home country or a third country

International investment

Transfer of assets to another country or the acquisition of assets in that country; AKA 'foreign direct investment' (FDI)

International portfolio investment

Passive owner-ship of foreign securities such as stocks and bonds, in order to generate financial returns

Drivers of Market Globalization

• Worldwide reduction of barriers to trade and investment

• Transition to market-based economies and adoption of free trade in China, former Soviet Union countries, and elsewhere

• Industrialization, economic development, and modernization

• Integration of world financial markets

• Advances in technology

Dimensions of Market Globalization

• Integration and interdependence of national economies

• Rise of regional economic integration blocs

• Growth of global investment and financial flows

• Convergence of buyer lifestyles and preferences

• Globalization of production activities

• Globalization of services

Societal Consequences of Market Globalization

• Contagion: Rapid spread of financial or monetary crises from one country to another • Loss of national sovereignty

• Offshoring and the flight of jobs

• Effect on the poor

• Effect on the natural environment

• Effect on national culture

The Four Risks of International Business

1. Cross-cultural risk

2. Country risk

3. Currency (Financial) risk

4. Commercial risk

Cross-cultural Risk

Occurs when a cultural misunderstanding puts some human value at stake.

Includes:

- cultural differences

- negotiation patterns

- decision making styles

- ethical practices

Country Risk (Political Risk)

the potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country.

•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.

GDP (Gross Domestic Product)

the total market value of all final goods and services produced annually in an economy

Currency Risk (Financial Risk)

currency exposure, asset valuation, foreign taxation, inflation

Commercial Risk

the firm's potential loss or failure from poorly developed or executed business strategies, tactics, or procedures

Why do Firms Internationalize?

1) seek opportunities for growth through market diversification

2) earn higher margins and profits

3) gain new ideas about products, services, and business methods

4) serve key customers better that have relocated abroad

5) be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in product sourcing

6) gain access to lower-cost or better-value factors of production

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

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

9) invest in a potentially rewarding relationship with a foreign partner

Driving Forces of Market Globalization

1. Worldwide reduction of barriers to trade and investment

2. Market liberalization and adoption of free markets

3. Industrialization, economic development, and modernization

4. Integration of world financial markets

5. Advances in technology

Firm-level Consequences of Market Globalization: Internationalization of the Firm's Value Chain

- Countless new business opportunities for internationalizing firms

- New risks and intense rivalry from foreign competitors

- More demanding buyers who source from suppliers worldwide

- Greater emphasis on proactive internationalization

- Internationalization of firm's value chain

Digital Technologies: internet-enabled internationalization

•Profound advances have occurred in computers, digital technologies, telephony, and the Internet.

•MNE s leverage digital technologies s to optimize their performance, managing operations around the world.

•Digital technologies opened the global marketplace to firms that historically lacked the resources to internationalize.

What type of risk is also known as political risk?

country risk

Focal firm

businesses that directly initiate international business transactions

International Investment

The transfer of assets to another country or the acquisition of assets in that country

GDP

the total value of products and services produced in a country over the course of a year

Fluctuating exchange rates are an example of which type of risk?

currency risk