IB - Chapter 1: Globalization & IB
4 Major Risks Firms Encounter Abroad
1) Cross-cultural risk 2) Country risk 3) Currency risk 4) Financial risk
Globalization of Markets
Def: ongoing economic integration and growing interdependency of countries worldwide •The merging of historically distinct and separate national markets into one huge global marketplace •In many markets today, the tastes and preferences of consumers in different nations are converging -->Coca Cola, McDonald's, IKEA, Starbucks, Apple -->Ex: A research done where going to various parts of the world and asking where is the closest McDonald's. Everyone could tell you where it was (globalization)
International Business
Def: performance of trade and investment activities by firms across national borders • IB involves cross-border transactions of goods and services between two or more countries. • IB consists of trade and transactions at a global level. • International business is a part of globalization
Decision Making Styles
Managers make decisions continually on the operations and future direction of the firm. EX: Japanese take considerable time to make important decisions. Canadians tend to be decisive, and "shoot from the hip".
Non-Governmental Organizations
Many of these non-profit organizations conduct cross-border activities. They pursue special causes and serve as advocates for social issues, education, politics, and research. Examples: • The Bill and Melinda Gates Foundation and the British Wellcome Trust both support health and educational initiatives. • CARE is an international non-profit organization dedicated to reducing poverty.
Cultural Differences
Risk arising from differences in language, lifestyle, attitudes, customs, and religion, where a cultural miscommunication jeopardizes a culturally-valued mindset or behavior
Small and medium-sized enterprise (SME)
Typically, companies with 500 or fewer employees, comprising over 90% of all firms in most countries. SMEs increasingly engage in international business.
Multinational Enterprise (MNE)
a large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries Ex: Caterpiller, Samsung, Unilever, Vodafone, Disney
The World Economy Today
a more integrated & interdependent global economic system with lower barriers to trade and investment
Born Global Firm
a young entrepreneurial company that undertakes substantial international business at or near its founding
All Value Adding Activities
including... • sourcing • manufacturing • marketing can be preformed in international locations
Globalization
is the integration of national economies through trade, investment, capital flow, labor, migration and technology
Negotiation Patterns
negotiations are required in many types of business transactions Ex: in Mexico a establishing a friendly social relationship may be emphasized prior to doing business, but in the U.S., principals may get to down to business more quickly.
Ethical Practices
standards of right and wrong vary considerably around the world EX: bribery is relatively accepted in some countries, but is unacceptable in others
Firms Internationalize
through various entry strategies Ex: • exporting • foreign direct investment
Cross-Cultural Risk
• Cultural differences • Negotiation patterns • Decision-making styles • Ethical practices
Currency (Financial) Risk
• 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. • Inflationary and transfer pricing: High inflation, common to many countries, complicates business planning, and the pricing of inputs and finished goods Examples: • The Japanese yen has fluctuated a lot since 2000. • The U.S. has relatively high corporate income taxes. • Brazil and Turkey have experienced very high inflation.
Today's World Reflects Globalization...
• Declining barriers to cross-border trade and investment • Advances in transportation and telecommunications • Material culture similar all over the world • National economies merging into integrated global economic system
Elements of International Business
• Globalization of markets • International trade • International investment • International business risks • Participants • Foreign market entry strategies
Country Risks
• Harmful or unstable political system • Laws and regulations unfavorable to foreign firms • Inadequate or underdeveloped legal system • Bureaucracy and red tape • Corruption and other ethical blunders • Government intervention, protectionism, and barriers to trade and investment • Mismanagement or failure of the national economy Examples: • The U.S. imposes tariffs on imports of sugar and other agricultural products. • Venezuela's government has interfered with the operations of foreign firms. • Argentina has suffered high inflation and other economic turmoil.
Implications of Technological Change
• Low cost communication networks help create electronic global marketplace • Low cost transportation makes it economical to ship products around the world • A reduction in cultural distance (music, retail, cars, luxury goods) ->As we travel around the world •A convergence of consumer tastes and preferences
International Investment
• The transfer of assets to another country or the acquisition of assets in that country • Also known as 'foreign direct investment' (FDI)
Commercial Risk
• Weak partner • Operational problems • Timing of entry • Competitive intensity • Poor execution of strategy General commercial risks such as these lead to sub-optimal formulation and implementation of the firm's international value-chain activities.
International Trade
• exchange of products and services across national borders • typically through exporting and importing Can involve... • products • services • capital • technology • know-how • labor
The 'Flows" of International Business
• knowledge • trade in products • trade in services • direct investments
International Portfolio Investment
• passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns
The Globalization of Production
•Sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (labor energy, land, and capital) •Lower overall cost structure and improve the quality or functionality of the product to compete more effectively
Drivers & Outcomes of Globalization
•Unprecedented growth of international trade. -In 1960, global trade was $100 billion per year. Today, world exports amount to some $18 trillion annually! •Development of sophisticated global financial systems and mechanisms. -Facilitate the cross-border flow of products, money, technology, and knowledge. •Greater collaboration among nations. Through multilateral regulatory agencies such as the
Why study International Business?
1. Facilitator of the global economy and interconnectedness. IB brings nations closer together. 2. Contributor to national economic well-being. IB fuels economic growth and rising living standards. 3. A competitive advantage for the firm. IB provides companies with many benefits, leading to profitability and competitive advantages. 4. A competitive advantage for you. Working internationally offers a range of enlightening experiences, new knowledge, and other benefits that enhance careers....and it's exciting! 5. An opportunity for global corporate citizenship. Firms must be ethical and socially responsible in their dealings because IB affects numerous constituents, often in unintended ways.
Why do firms participate in international business?
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 that have relocated abroad 5. Be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products 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
Two Key Facets of Globalization
1. globalization of markets 2. globalization of production
