Global Environment of Business Test 2
Contract Manufacturing
Private-label manufacturing by a foreign country
Joint Venture
Private-label manufacturing by a foreign country
Estimating the potential of emerging markets
Product market: size, growth rate, competition, product segments, IPLC, etc Consumer Target: Who?, consumer segments, purchase and consumption behavior trends, etc
opportunity cost
The value of what is foregone or the cost of giving something up to get something else The ability of one country to use its resources to make a product more efficiently (at a lower opportunity cost) than another country
Physical risk example
Violence against employees regular attacks on company compounds kidnap foreign oil workers Shell Oil Company hire security firms build local schools, hospitals, etc located in the oil rich region of Nigeria
Implications to MNEs - Samsung Example
government scandal exposure - bad PR right increase, gov't policy controls unfair competition- discriminating chaebols, gov't favoritism, consumer loyalty US companies operate under Foreign Corrupt Practices Act Opportunity - US electronics companies Limited access to SK resources/ Comparative advantage Economic/Political Progress halted- bilateral/ trilateral agreements (North Korea progress Economic policies (2007 to 2015: 11th to 27th place on global comp rank)
Global Challenger TATA
affordable car, nano positioned as no frills entry target _ Indians using 2 wheelers market "game changer" Failure in Indian market Total loss $1B US affordable became cheap Minimal exports
Association of Southeast Asian Nations (ASEAN)
an economic union compromising 10 member states in Southeast Asia: -intergovernmental cooperation -Facilitates economic, political, security, military, educational and sociocultural integration among members and other countries
Economic freedom
the freedom to prosper within a country without intervention from a government economic authority. Individuals are free to secure and protect his/her Human Resources, labor and private property
ASEAN (Association of Southeast Asian Nations)
an organization of countries in Southeast Asia set up to promote cultural, economic, and political development in the region, ASEAN was officially formed in 1967 with the signing of the Bangkok Declaration
Factor endowments
can be inherited or acquired natural endowments designed endowments (deliberated public policies) ex. capital, land, labor
Emerging markets' company growth
companies in emerging markets grew 2x as fast as companies in developed markets and grew 2.5x faster in neutral foreign markets Higher reinvestment rates More agile asset reallocation Business Models more growth-oriented (growing emerging middle class with lower cost products vs. branded products among higher margin segments) New patents growth 3x higher
Why governments nationalize
extract government revenue (firms concealing profits), Maximize government revenue (more efficient operation) Ideology or politics (1980s socialist party France nationalizes banking, aerospace, steel) Job or industry preservation (from foreign investment/ competition Already invested significant subsidies
China shift
from low cost producer for the world's advanced economies to high tech manufacturing and producer of Chinese branded products In 2012, china accounted for 20% of global manufacturing
Export
Sell domestically produced products to buyers in other countries
Comparative Advantage
the ability to produce a good at a lower opportunity cost than another producer, not necessarily at a greater volume
Stages of Global Business Development
1. Companies operate in one country and sell into others 2. Set up foreign subsidiaries to handle sales 3. Operate an entire line of business in another country 4. Virtual Operation
Global Cost of Corruption
$2.6 trillion annually, 5% of global GDP Increases cost of doing business: 10% globally Includes political corruption like bribes
Risk Levels for 5 Methods of Entering the Global Marketplace
(Low Risk, Low Return -> High Risk, High Return) Exporting Licensing Contract Manufacturing Joint Venture Direct Investment Most complex entry mode: FDI, high risk, high control Simplest entry mode: exporting, low risk, low control
Today's form of Protectionism
-Temporary trade barriers -Countervailing duty: counteract artificially low prices that are result of subsidies -antidumping: combat "dumping" where exporter sets prices at low point to intentionally lose money and harm the domestic producers of the importing country -farm subsidies -health and safety requirements -patriotic marketing messages -"Bundled deals"- Foreign companies must transfer intellectual properties to indigenous Chinese manufacturing companies in order to build factories -Visa quotes: labor as an export -Ways to get around free trade agreements (tariff based)
South Korea Example
-squeezed between economic titans: China (price), Russia, Japan (quality) -Innovation, Technology, and Design -Highly skilled labor force -Samsung, LG, Hyundai -Government: World class infrastructure, high quality education system 1960s: one of the poorest nations 2014: World's 13th largest economy Agrarian -> Technology
ASEAN member countries
-various economic progress -unique consumer opportunities for MNEs -demonstrates many concepts we've learned IPLC (evolution), transition to advanced economies (factor and characteristics), risks and implications for MNEs
Russia Market Entry Strategy
1. Distributors- most common 2. Representative Branch offices 3. Wholly owned subsidiaries 4. Agents (face competitive focus issues)
Political Risk - Coca Cola ex
1856: Entered India with 100% FDI (foreign equity) 1973: Indian Foreign Exchange Regulation Act implemented, required 40/60% equity split with domestic partners, Coke agreed, wanted full operating control, Government retaliated demanding Coke Formula 1977: Coke leaves India (20K investment: 8m return 1993: New liberalization policies encourage Coke to reenter, FDI > 40% put foreign companies on par with Indian Companies 1999: Coke buys Parle (India's #1 CSD company, 60% market share), Instant access to major brands and bottling distribution network
Protest Risk Example
A consortium of foreign companies planning to construct a hydroelectric power plant was hit with large scale protests from Brazilian environmental groups Alcoa responded by agreeing to spend more money on compensating people who were being resettled and on mitigating environmental damage By agreeing to spend more money, Alcoa managed to avoid large delays from protests
Comparative Advantage and International Trade
A country should specialize in producing and exporting only those goods and services which it can produce relatively more efficiently (at lower opportunity cost) than other goods and services (which it should import) Results from different/limited factor endowments of production (capital, land, labor), entrepreneurial skill, power resources, technology, etc Therefore, free trade is beneficial to all countries, because each can gain if it specializes according to its comparative advantage
Subsidies
Airbus Boeing example Pros: Help promising enterprise grow and profit heck develop an industry to become comparative advantage encourages R&D, innovation Encourages exports can help create jobs can create tax revenues Cons: Loss of competitiveness of industry Sustains inefficient enterprises opportunity costs to society higher taxes
Absolute Advantage
Almost all countries have absolute advantage for at least one good or service. China: manufacturing goods (low unit labor costs) Canada: agricultural production (large area of low cost underdeveloped land) Theory refers to ability to produce more and better goods at same input level
APEC
Asia-Pacific Economic Cooperation (APEC) is a forum for 21 Pacific Rim member economies that promotes free trade throughout the Asia-Pacific region
Silicon Valley (Country) Comparative Advantage
Biggest in the world, Highly profitable, World class talent, Mecca for innovation Leverages US comparative advantage: highly skilled workforce and capital intensive resources "Acquired or Designed Endowments" US gov't investment in technology research, attraction of foreign scientists US gov't purchases of new technology, brought innovations to scale
Coca Cola Political Risk
Coke's absence 1977-1993, 50 major CSD brands were developed and marketed by Indian companies, 200 production plants set up, Over time: per capita consumption has doubled, disappearance of indigenous drinks, lower demand for healthier beverages Coca Cola Company's 7th largest market globally have invested over $1B in country 7000 employees 125,000 tertiary employees 27 wholly owned bottling ops
Silicon Valley: Industrial Cluster
Companies can operate as if: They have greater scale, They joined forces without sacrificing flexibility Access to workforce talent, Productivity, Access to specialized information
Russia Politcal risk
Corruption Perception Index: Ranked 168th Weak protection of property rights, weak governance, lack of corporate transparency Ranked third for FDI, but one of the most politically corrupt nations in the world Economy based on small number of large enterprises in which the state holds majority share State owned enterprise dominate all strategic sectors: Energy, transport, banking, accounting for about half GDP Systematic Corruption: Socially, corrupt practices are justified as a social norm by the average russian Systematic favoritism: Placing high ranked officials on boards of state owned enterprises Institutional Ambiguity: Government sets no clear lines between formal and informal standards Government enacted policies to mitigate corruption: WTO and OECD policies instituted, 2012 National Anticorruption Plan prosecuted 889 state officials and 1159 law enforcement officials, 2019 Russia expands corporate liability for bribery
Economic Risk example
Econet decided the unstable economy, high inflation and opaque government in Zimbabwe represented a considerable business risk, the company responded by diversifying and entering other African markets In order to counter the very high inflation in Zimbabwe, the company sent some of its Zimbabwean technicians to work in the new countries where Econet was operating, This enabled the technicians to save money and allowed eco net to keep its best people.
Protectionism
Economic policy of shielding an economy from imports.
Brexit
Economic: Redistribution of Britain's wealth, adoption of euro (weaker than pound) Immigration: EU poorer member countries labor shift to UK Identity: Potential loss of sovereign/cultural identifiers Ability to govern: Too many restrictions on lawmaking/control
Why do nations pursue economic integration?
Expand Market size achieve economies of scale attract direct investment from foreign firms/nations Strengthen political position Promotes domestic internationalization
TATA motors Globalization Strategy
Expansion: 14-15 countries where market conditions similar to India Manufacturing, Sales and marketing Market Assessment: Market Opportunity, Labor Skills Korea: Synergies with product strategy and R&D, Develop a world truck for home and foreign markets South Africa: Distribution Networks, Consumer Behavior, Supply chain Thailand: 2006, joint venture with Thonburi auto plant, hub to manufacture and distribute vehicles to Asian markets Develop a consumer pick up for home and international markets Latin America: Strategic Alliance with Fiat Truck for Latin American markets Other markets includes Indonesia, Philippines, Malaysia, Vietnam. High growth markets, middle class spending increasing, competition already entrenched Brazil: Market leader for premium mid sized SUVs, 30 market share and growing In 2015, established production in Brazil, first wholly owned mfg plant outside UK, First UK automotive mfg facility to latin america already in UK and China Instead of: India (already have plant there), Mexico (cheap labor and proximity to US market) Brazil's auto sales decline (high inflation and negative consumer sentiment)
Brexit impact on the World
For UK/EU Markets: Uncertainty about economic growth drives financial markets down, investment slows, economy slows For US Markets: Strong US dollar vs British Pound Hurts US Exports by making products more expensive to foreign buyers For Global Markets: Slowdown of exports to UK Slowdown of capital and labor flows into UK Global economic slowdown
Organization for Economic Cooperation and Development (OECD)
Forum where governments of 34 democracies with market economies work with each other as well as with more than 70 non member economies to promote economic growth, prosperity and sustainable development
Protectionism on the rise
In 1930, aggressive surge in protectionism deepened and lengthened the Great Depression which wipe out more than half of global trade Smoot Hawley Tariff of 1930: protected US farmers from European imports, ultimately spanned across numerous other imports, countries retaliated resistant competitive war restricted global trade; deepened depression Since 2008, according to WTO, G20 economies have introduced 1583 new trade restricting measures and removed just 387, 5% reduction of global trade In 2015, half of all new protectionist policies enacted were from India, Indonesia, china and Russia In 2016, the G20 imposed 350 new measures, 4x more than 2009 ex. China overcapacity of steel: anti dumping laws in US and EU, Introduction of checks at the border with Kazakhstan to ensure that trucks crossing use Russia's own satellite navigation system rather than GPS
Political Risk and Global MNEs - Samsung Example
Largest Chaebol in country Samsung electronics = 20% of country exports Market cap = 25% of all listed companies Third generation leadership Top 10 Chaebol's generate 80% GDP Endemic corruption Corporate Chaebol favoritism 6 out of 10 chaebols leaders convicted fo white collar crime still run businesses President Impeachment (2016) Government efforts to end collusion practices Samsung de facto President Lee Jae-yong indicated: Collusion and bribery with President aide ($38M) Perjury Political Favoritism Merger and Acquisition green lights, suffered $123 m pension fund losses
Licensing
Legal process allowing use of manufacturing/patents/knowledge
TATA motors Globalization Strategy continued
Luxury vehicles sales rise in Brazil, lower raw material and operating costs than UK, help mitigate transportation costs and import tariffs Aim to reduce vehicle prices, will source locally key parts Chassis, seats, powertrain Protect against currency fluctuations CSR: education business partnership centre 12K, children develop key skills and work awareness Sustainability: rainwater collection and plating of more than 1200 indigenous trees to help preserve and improve the natural habitat around the factory US market: potential to build manufacturing plant by 2020, sourcing aluminum, market size not at threshold to justify
International Product Life Cycle Theory (IPLC)
Measures : Exports, Time Players: Country, Company Production of goods that are human and physical capital intensive because of the relative abundance of a highly educated labor force and technically sophisticated equipment in the United States -> Until production and tech can be standardized, then comparative advantage goes to low skill nations (china)
Growing middle class implications to MNEs
New source of growth - saturation in domestic market New product offerings - Premium/Luxury market, Senior Market Product efficiencies - Standardization Opps Operations/Manufacturing - Potential cost increases, seek new low cost labor markets, skilled source of labor, value chain efficiencies Market entry timing - dominance, first in advantage, capital investment significant Intensifying Competitive Pressure - Born globals/global challengers, advantage to disadvantage Home market: Economic Policy Shifts - Maximize Market Attractiveness, retain capital investment CSR pressure - Depletion of resources, government policies
Russia Business Sector Risk
Over 1000 American companies with business in Russia, Considerations: Geopolitics and market dynamics Continued aggression with Ukraine/Syria Interference US elections Increasing state dominance in industry High costs of borrowing Lack of economic reform
European Union Benefits
Political/Legal: European Harmony through economic and political stability Legal and Human rights Modernization of Countries ex Turkey Economic: Strength in numbers 7% worlds population but 23% global GDP 30% increase in trade within EU Higher incomes and more jobs Cutting customs bureaucracy, reduced costs and delivery times Poorer countries (Spain, Portugal and Ireland) stronger economic development Inward investment 10x greater than prior(1992) Free movement of labor and capital Consumer: Free to shop any country without tariffs Deregulation of airlines, electricity and gas
United States Comparative Advantage
Productions of goods and services that are human and physical capital intensive because of the relative abundance of a highly educated labor force and technically sophisticated equipment Technological Innovation: Development and design of high tech products, telecommunication systems, green products and manufacture systems
Political Risk
Risk associated with political changes that may negatively impact domestic and foreign firms.
Take over risk example
Sierra Bauxita Dominicana had terminated all exploration, production and sales activity and has furloughed its entire Dominican staff pending resolution This action had been taken because they were unable to conclude current mining and exploration concession and because the government of the Dominican Republic expropriated, without compensation, its bauxite is stockpiled at the port Established in 2006, Sierra Bauxita Dominicana owns contractual rights for the exploration, mining and exploration of metallurgical grade bauxite. The mind is located in the Perdernales region of DR. The mangling partners have over a decade of experiences working in the bauxite business in the Dominican Republic. A stable economy and pro-industry government are two very positive elements that are helping to create a thriving bauxite exportation business in this 21st century
Types of Political Risk
Take Over Risk Protest Risk Physical Risk Economic Risk
Brexit No-deal implications to MNEs
Tariffs on imports to UK - Raw materials, parts costs rise; non-competitive Tariffs on exports from UK- UK companies prices rise; non-competitive Border delays of parts, goods- slow production, costs rise, demand declines Loss of EU agricultural subsidies- UK industry production costs rise, demand declines ex. BMW halts production, moves Mini Cooper production out of England, stock piling parts, Honda plans to shutter UK plant permanently, Nissan reversed plan to build X Trail Sport Utility in England
Comparative advantage examples
The rain forest national specializes in rope products, which it exports, and relies on imports for more technical products which it cannot produce, thus gaining comparative advantage in the marketplace. Country X had a comparative advantage in the manufacture of electronics over many countries due to its large labor force and lower wages
competitive advantage
a set of unique features of a company and its products that are perceived by the target market as significant and superior to those of the competition. can be sourced from end product attributes/benefits and internal value chain that translate into attributes and/or benefits for the consumer
Mercosur
a subregional bloc, its full members are Argentina, Brazil, Paraguay, Uruguay and Venezuela (which was supposed to be suspended on Dec 1 2016)
Direct Investment
active ownership of a foreign company/manufacturing facility
Silicon Valley (Country) Competitive Advantage
home of 2000 tech firms including apple, Netflix, and google Densest concentration in the world Proximity to: suppliers, customers, cutting edge research/innovation, tech capital Hard to replicate: spirit fo cooperation, professional networks, prohibited non-compete clause, cultural diversity, top universities BUT US is losing its competitive advantage, tech jobs outsourced to foreign born engineers because American supply of labor < demand
Subsidies negative impact on world economy
loss of competitiveness of industry: opportunity costs to society higher taxes artificially low prices create "category killers" competitors leave market lack of innovation poor quality goods lack of consumer choice Opportunity costs to society: Program tradeoff- government monies otherwise allocated to other policies and programs higher taxes: citizens pay for subsidies which leads to inefficient economy
How does protectionism impact world economy
slows globalization reduces industrial competition lack of innovation produces inferior products support higher prices/fewer choices (reduced supply) lower GDP growth (trade allow countries to export a comparative advantage and exploit economies of scale and growth MNEs avoid tariffs from FDI and transferring value chain activities