MAN 3600 Exam 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.

Socialization

The process of learning the rules and behavioral patterns appropriate to one's society.

acculturation

the process of adjusting and adapting to a culture other than one's own

Culture is...

• Not right or wrong: it is relative. there is no cultural absolute. different nationalities perceive the world differently

• not about individual behavior: it is about groups. it is a collective phenomenon of shared values and meanings.

• not inherited: it derives from the social environment. we are not born with a shared set of values and beliefs; we acquire them as we grow up

Essential Elements of Culture

• cross-cultural risk

• dimensions
  -language

• religion

• models and explanations

• managerial implications

Values and Attitudes

Values: represent a person's judgements about what is good or bad, acceptable or unacceptable, important or unimportant, and normal or abnormal

Attitudes: and preferences are developed based on values, and are similar to opinions, except that attitudes are often unconsciously help and may not have a rational basis.

Culture as an Iceberg

TIP: HIGH CULTURE; cultural makeup that is visible (fine arts, drama, literature, classical music)

BASE: FOLK CULTURE; cultural makeup we are aware of (humor, religion, cooking, popular music, dress, folk dancing, diet etc)

MAJORITY OF ICEBERG: DEEP CULTURE; cultural makeup we are unaware of ( gender roles, greeting rituals, relationships, communication etc)

Manners & Customs

refer to ways of behaving and conducting oneself in public and business situations. They are present in eating habits, mealtimes, work hours and holidays, drinking and toasting, appropriate behavior at social gatherings (kissing, handshaking, bowing), gift-giving (complex), the role of women, and much more.

Perceptions of SPACE

reflects each culture's orientation about personal space and conversational distance

Perceptions of TIME

Time dictates expectations about planning, scheduling, profit streams, and what constitutes tardiness in arriving.

Monochronic: a rigid orientation to time (focused on schedules, punctuality, time as a resource, time is linear, "time is money", United States)

Polychronic: a flexible, non-linear orientation to time in which the individual takes a long-term perspective; time is elastic, along delays are tolerated before taking action. Punctuality is relatively unimportant. Relationships are valued. (Africa, Latin America, Asia)

Symbol

can be letters, figures, colors, or other characters that communicate a meaning. Examples include flags, anthems, seals, monuments, and even historical myths.

Material

productions are artifacts, objects, and technological systems that people construct to function within their environments.

Social Structure

a pattern of organized relationships among groups of people within a society. Society is organized as:

• individuals, family, reference groups, social stratification, social mobility.

Language

The "mirror" or expression of culture; essential for communications; provides insight into culture.

Most common languages: Chinese, Spanish, English, Hindi, Arabic, Portuguese

Non-verbal language (communication)

ways to talking (volume), sounds, closeness, body contact, posture and stance, head movements, eye movements, facial expressions, hand movements, appearance.

Religion

a system of common beliefs or attitudes regarding a being or system of thought that people consider sacred, divine, or the highest truth; and the associated moral values, traditions, and rituals.

Role of Religions in Islamic Societies

• islam is the basis for government, legal and social systems. As muslims view God's will as they source of all outcomes, they are relatively fatalistic and reactive.

• islam's holy book, the Qur'an, prohibits drinking alcohol, gambling, usury, and "immodest" exposure. The prohibitions affect firms dealing in various goods.

  Examples: Nokia launched a mobile phone that shows muslims the direction towards Mecca, Islam's holiest site

  Heineken rolled out the non-alcoholic malt drink Fayrouz

Cultural Metaphors

refer to a distinctive tradition or institution strongly associated with a society; a guide to deciphering attitudes, values, and behaviors

• American football represents systematic planning, strategy, leadership, and struggling against rivals

• Spanish bullfighting reflects the importance of ritual, style, courage, and pride in Spain.

HALL'S high-and low-context cultures

Low-context cultures: rely on explicit explanations. Such cultures emphasize clear, efficient, logical delivery of verbal messages. Communication is direct. (German, Swiss, Scandinavian, North America)

High-context cultures: emphasize nonverbal or indirect language. Communication aims to promote smooth, harmonious relationships. Such cultures prefer a polite, "face-saving" style that emphasizes a mutual sense of care and respect for others. Care is taken not to embarrass or offend others. (Chinese, Korean, Japanese, Vietnamese)

Hofstede's Culture Typology

1. Individualism versus collectivism

2. power distance

3. uncertainty avoidance

4. masculinity vs. femininity

5. long-term vs. short-term orientation

6. [[6. indulgence vs. restraint]]

Individualism vs. Collectivism

Individualism: Values individual freedom, achievement, and competition (Australia, Britain, Canada, US)

Collectivism: Values group harmony, cohesiveness, consensus, and cooperation (China, Panama, Japan, South Korea)

Power Distance

How a society deals with inequalities in power that exist between the weak and powerful.

• top management tends to be autocratic, giving little autonomy to lower-level employees.

• HIGH POWER distance countries include: Guatemala, Malaysia, Philippines, and several Middle East countries

• LOW POWER distance societies include Scandinavian countries.

Uncertainty Avoidance (UA)

• extent to which a society feels threatened by uncertain and ambiguous situations

• HIGH UA societies create institutions to minimize risk and ensure security.

  • stable careers and regulate worker actions. decisions are made slowly.

  • examples: Belgium, France, Japan

• in LOW UA societies, managers are relatively entrepreneurial and comfortable with risk

  • examples: ireland, jamaica, us

Masculinity vs Femininity

Masculinity: refers to a society's orientation based on traditional male and female values. Masculine cultures value competitiveness, ambition, assertiveness, and the accumulation of wealth.

• both women and men are assertive, focused on career and earning money (Australia and Japan)

Femininity: culture emphasizes nurturing roles, interdependence among people, and caring for less fortunate people - both men and women.

• Scandinavian countries, where welfare systems are highly developed, and education is subsidized.

Long Term vs Short Term orientation

• Long Term: Values saving and persistence in achieving goals (Asian cultures)

• Short Term: Values happiness and living in the present (United States; Western countries)

Indulgence vs. Restraint

the extent to which people try to control their desires and impulses

indulgent: allow relatively free gratification of their basic and natural human desires related to having fun and generally enjoying life. (Denmark, Mexico, and the US score high on indulgence)

restrained: believe that such gratification should be curbed and regulated by strict norms. (China, Iraq, South Korea)

Deal vs. Relationship Orientation

deal oriented: managers focus on the task at hand, are impersonal, typically use contracts, and want to just "get down to business" (australia, Northern Europe, and north America)

relationship-oriented: managers value affiliations with people, rapport, and getting to know the other party business interactions. Relationships are more important than individual deals; Trust is much valued in business agreements. (China, Latin American countries)

Guanxi in China

• refers to social CONNECTIONS and relationships based on mutual benefits

• emphasizes RECIPROCAL exchange of favors as well as mutual obligations

• rooted in ancient Confucian philosophy, which values social hierarchy and reciprocity.

• engenders TRUST, thereby serving as a form of insurance in a potentially risky business environment.

National, Professional, and Corporate Culture

1. National Culture: nationality, ethnicity, gender, religion, social institutions, social class, educational systems.

2. Professional Culture: academe, business, banking, engineering, computer programming, legal, medical, military

3. (last) Corporate Culture is continued after

Ethnocentric orientation

using our own culture as the standard for judging other cultures

Polycentric Orientation

A mindset in which the manager develops a greater affinity (liking) for the country in which he or she works than for the home country

Geocentric Orientation

a global mindset by which the manager can understand a business or market without regard to country boundaries

cultural imperialism

negative reaction to cultural dominance through the introduction of cultural change

Managerial Guidelines for Cross-Cultural Success

-Acquire factual and interpretive knowledge about the other culture

-Avoid cultural bias

-Develop cross-cultural skills, such as perceptiveness, interpersonal skills, adaptability

self-reference criterion

the tendency to view other cultures through the lens of our own culture - understanding this is the first step

Critical Incident Analysis

a method for analyzing awkward situations in cross-cultural encounters by becoming more objective and developing empathy for other points of view

1. Identify situations where you need to be culturally aware to interact effectively with people from another culture

2. when confronted with "strange" or awkward behavior, discipline yourself to not make judgments

3. develop your best interpretation of the foreigner's behavior, and formulate you response

4. learn from this process and continuously improve

personality traits for cross-cultural proficiency

• Tolerance for ambiguity: Ability to tolerate uncertainty and lack of clarity in the thinking and actions of others.

• Perceptiveness: Ability to closely observe and comprehend subtle information in the speech and behavior of others.

• Valuing personal relationships: Ability to appreciate personal relationships, which are often more important than achieving one-time goals or "winning" arguments.

• Flexibility and adaptability: Ability to be creative in devising innovative solutions, be open-minded about outcomes, and show 'grace under pressure'.

National Level Theories (Why do nations trade? )

Classical Theories:

• Mercantilism

• Absolute Advantage Principle

• Comparative Advantage Principle

• Factor Proportions Theory

• International Product Life Cycle Theory

• New Trade Theory

• Overlapping Product Ranges Theory

National Level Theories (How can nations enhance their competitive advantage?)

Contemporary Theories:

• Competitive Advantage of Nations

• Michael Porter's Diamond Model

• National Industrial Policy

Firm Level Theories (Why and How do firms internationalize?)

Firm Internationalization

• internationalization process of the firm

• born globals and international entrepreneurship

Firm Level Theories (How can internationalizing firms fain and sustain competitive advantage?)

FDI-Based Explanations:

• monopolistic advantage theory

• internalization theory

• dunning's eclectic paradigm

Non-FDI-based Explanations:

• international collaborative ventures

• networks and relational assets

The evolution of International Trade theory - 1 MERCANTILISM

A belief popular in the 16th century (Approximately 1500-1800) that [[national wealth]] results from MAXIMIZING EXPORTS AND MINIMIZING IMPORTS.

• today, some argue for /neomercantilism/ - the idea that the nation should run a trade surplus.

• supporters of neomercantilism include: labor unions (who want to protect domestic jobs), farmers (who want to keep crop prices high) and, some manufacturers (that rely on exports)

• mercantilism's downfall was its [[win-lose]] logic based on the accumulation of wealth

• governments still follow neo-mercantilism policies in the conduct of trade

What did the industrial revolution introduce?

• benefits of mass production

• lowered prices

• increased supplies of goods

• diminished the exploitation of colonies and trading partners

FREE TRADE

The absence of restrictions to the flow of goods and services among nations.

Free trade is usually best because it leads to:

• more and better choices for consumers and firms

• lower prices of goods for consumers and firms

• higher profits and better worker wages (because imported input goods are usually cheaper.)

• higher living standards for consumers (because their costs are lower)

• greater prosperity in poor countries

The evolution of International Trade theory - 3 THE THEORY OF COMPARATIVE ADVANTAGE David Ricardo (1817)

The foundation concept of international trade, which answers the question of how NATIONS can achieve and sustain economic success and prosperity.

• it refers to the superior features of a country that provide it with unique benefits in global competition.

• [[comparative advantages]] are derived from either NATURAL ENDOWMENTS or from deliberate NATIONAL POLICIES.

(tall man should specialize in picking apples and short man should specialize in picking strawberries)

EXAMPLES:

• france: has climate and soil superior from producing wine.

• saudi arabia: natural abundance for oil in order to produce petroleum products.

• Japan: cars.

• india: base of IT workers for producing computer software.

COMPETITIVE ADVANTAGE

• a foundation concept that explains how INDIVIDUAL FIRMS gain and maintain distinctive competencies, relative to competitors, that lead to superior performance.

• it refers to the /distinctive assets, competencies, and capabilities/ that are developed or acquired by the firm.

• the collective competitive advantages held by the firms in a nation are the basis for the competitive advantage of the nation at large.

Examples:

• DELL: global supply chain

• SAMSUNG: technological leadership in flat-panel televisions

• HERMAIN MILLER'S: design strengths in office furniture

The evolution of International Trade theory - 2 THE THEORY OF ABSOLUTE ADVANTAGE Adam Smith (1776)

The ability of a country to produce a product with fewer inputs than another country

• a country should produce only those products in which it has absolute advantage or can produce using fewer resources than another country

Limitations of Classical Trade Theories

• fail to account for international TRANSPORTATION COSTS

• GOVERNMENTS distort normal trade by selectively imposing protectionism (e.g. tariffs) or investing in certain industries (e.g. via subsidies)

• SERVICES: some cannot be traded; others can be traded freely via the internet or global telephony

• for many firms, SCALE ECONOMIES and superior BUSINESS STRATEGIES provide efficiencies and other advantages. Early trade theories failed to account for this (e.g. Japan lacks comparative advantages, but its firms succeeded anyway, via superior strategies)

The evolution of International Trade theory - 4 THE THEORY OF FACTOR PROPORTIONS Heckscher & Ohlin (1949-1977)

AKA Factor Endowments Theory

• Developed by Eli Hecksher & expanded by Bertil Ohlin

• Capital in addition to labor (introduced capital to theory)

• it argues that each country should produce and export products that intensively use RELATIVELY ABUNDANT FACTORS of production, and import goods the intensively use relatively scarce factors of productions.

The evolution of International Trade theory - 5 THE LEONTIEF PARADOX Wassily Leontief (1950)

the test: could factor proportions theory be used to explain the types of goods the United States imported and exported?

the method: input-output analysis

the findings: the US exported LABOR-INTENSIVE products and imported CAPITAL-INTENSIVE PRODUCTS

the controversy: findings were the opposite of what was generally believed to be true

The evolution of International Trade theory - 6 THE OVERLAPPING PRODUCT RANGES THEORY Staffan Burenstam Linder (1961)

• work focused on preferences of consumer DEMAND

• today, determined market segments

key arguments:

• trade in manufactured goods dictated not by cost concerns, but by similarity in product demands across countries

• as per capita income rises, the quality and complexity of products demanded rises.

• businesses know more about their domestic markets than about foreign markets

• the OVERLAPPING RANGES of products sophistication (demand similarity) determines the export of the product.

contribution:

• extending trade theory BEYOND COST CONSIDERATIONS.

The evolution of International Trade theory - 7 INTERNATIONAL PRODUCT LIFECYCLE THEORY Raymond Vermon (1966)

• each product and its associated manufacturing technologies go through three stages of evolution: INTRODUCTION, MATURITY, AND STANDARDIZATION.

• the INTRODUCTION stage: the inventor country enjoys a monopoly both in manufacturing and exports. (e.g. television sets in US)

• the MATURITY stage: the products manufacturing becomes relatively standardized, other countries start producing and exporting the product

• the STANDARDIZATION stage: manufacturing ceases in the original innovator country, and it becomes a net importer of the product. Today under globalization, for many products, cycle occurs quickly.

The evolution of International Trade theory - 8 IMPERFECT MARKETS AND TRADE THEORY (AKA NEW TRADE THEORY) Paul Krugman (1985)

Krugman's 2 types of Economics of Scale:

[[Internal]] Economies of Scale : internally, the larger the firm, the lower the unit cost of its narrow line products, allowing it to monopolize domestic and international markets and set prices (imperfect markets)

[[External]] Economies of Scale: externally, if industry size sets unit cost of outputs, then firms of competing countries cannot enter the industry.

IMPLICATIONS:

• Government can play beneficial role when markets are not purely competitive

• theory expands to government's role in international trade

• four circumstances exist that involve imperfect competition in which strategic trade may apply: PRICE, COSTS, EXTERNALITIES, AND REPETITION.

The evolution of International Trade theory - 9 THE COMPETITIVE ADVANTAGE OF NATIONS AKA DIAMOND MODEL Michael Porter (1990)

• Innovation is what drives and sustains competitiveness

  4 components of competition:

• factor conditions

• demand conditions

• related and supporting industries

• firm strategy, structure, and rivalry

Critical Role of INNOVATION in National Economic Success

innovation is a key source of competitive advantage

• the firm innovates in 4 major ways, it can develop:

  1. a new product or improve an existing product.

  2. New ways of manufacturing

  3. new ways of marketing

  4. new ways of organizing company operations

• many innovative firms in a nations leads to national competitive advantage

Critical Role of PRODUCTIVITY in National Economic Success

• productivity is the value of the output produced by a unit of labor or capital

• it is a key source of competitive advantage for firms

• the greater the productivity of the firm, the more efficiently it uses its resources

• aggregate productivity is a key determinant of the nations standard of living.

National Competitive Advantage & Product Cycle Theory

Firm Strategy, structure, & rivalry: the conditions in the home nation that either hinder or aid in the firm's creation, organization, management, and sustaining international competitiveness.

National Competitive Advantage & Overlapping Product Ranges Theory

Demand Conditions: the nature of home demand in a specific industry.

National Competitive Advantage & New Trade (Krugman) Theory

Related and Supporting Industries: the competitiveness of all related industries and suppliers to the firm.

National Competitive Advantage & Factor Proportion Theory

Factor Conditions:

The appropriateness of the nation's factors of production to compete successfully in a specific industry.

Industrial Cluster

A concentration of suppliers and supporting firms from the same industry located within the same geographic area.

• a strong cluster can serve as an export platform for the nation

Examples:

Silicon Valley

Stages in Company Internationalization

1. domestic focus

2. pre-export stage

3. experimental involvement

4. active involvement

5. committed involvement

Monopolistic Advantage Theory (FDI THEORIES)

Argues that MNEs prefer FDI because it provides the firm with control over resources and capabilities in the foreign market, and a degree of monopoly power relative to foreign competitors

• key sources include: proprietary knowledge, patents, unique know-how, and soul ownership of other assets

Internalization Theory (FDI THEORIES)

Explains how the MNE chooses to acquire and retain one or more value-chain activities inside itself

• such internalization provides the MNE with greater control over its foreign operations.

• internalization avoids the drawbacks of dealing with external partners, such as reduced quality control and the risk of losing proprietary assets to outsiders.

Dunning's Eclectic Paradigm

Three conditions determine whether or not a company will enter a given foreign country via FDI:

• ownership-specific advantages location

• specific advantages

• internalization advantages

International Collaborative Ventures

A form of cooperation between two or more firms. Partners pool resources and capabilities to create synergies, and share the risk of joint efforts

Equity-based joint ventures

result in the formation of a new legal entity. In contrast to the wholly-owned FDI, the firm collaborates with local partner(s) to reduce risk and commitment of capital.

project-based alliances

do not require equity commitment from the partners but simply a willingness to cooperate in R&D, manufacturing, design, or any other value-adding activity. Since project-based alliances have a narrowly defined scope of activities and timeline, they provide greater flexibility to the firm than equity-based ventures.

MNEs are also known as which of the following?

MNC's

________ refers to the transfer of assets to another country or the acquisition of assets in that country.

International Investment

Which of the following countries is the leading nation in the international services trade as % of GDP?

Ireland

Which of the following types of risk is NOT presented in the course as a risk associated with international business?

Technological Risk

Which of the following countries hosts the greatest number of MNEs?

United States

Which of the following countries has the most foreign reserves per capita?

Singapore