International business course INTERNTIONAL BUSINESS – MBA Griffin R Pustay M INTERNATIONAL BUSINESS https://www.belstu.by/Portals /0/Charles-Hill-InternationalBusiness.pdf International Business is all business transactions - private & governmental – that involve two or more countries. Private companies undertake such transactions for profit; governments may or may not do the same in their transactions. Evolution of International Business International Trade India, during 1980s could create markets for its products, in addition to mere exporting. International Business International Marketing Later, they started producing in one foreign country and marketing in other foreign countries. For example, Uni Lever established its subsidiary company in India, i.e., Hindustan Lever Lim ited (HLL). HLL produces its products in India and markets them in Bangladesh, Sri Lanka, Nepal etc • International business includes any business transactions that are carried out by two or more countries. • The parties involved in such transactions may be submitted by individuals , private companies , groups of companies and / or government organizations . As an example, we can consider operations such as : • the purchase of raw materials in one country and their transport into the territory of another country for further processing; • a transportation the finished products from one country to another for the purpose of sale in the retail trade; • building factories in foreign countries in order to get profit based on the use of cheaper labor; • a Bank loan of one country to finance operations in another country. International company organization carrying out the export of national capital abroad for doing business in other countries. Internal entrepreneurship ( incountry business ) is reduced to the implementation of business operations , not going beyond the borders of one state . т Characteristic features of IB : 1. The main aim of IB, as well as incountry ,is to make a profit . 2. IB - it is primarily a business interaction of private firms or their units located in different countries. 3. IB is based on the possibility of benefiting from the advantages of cross-country deals . Why do the Business firms of a country go to other countywide? 1) to achieve Higher Rate of Profits 2) because of excess production What differentiates international business from domestic ones? • • • • • • Competition, legal restraints, government controls, weather, fickle consumers and a number of other factors What then makes Internationalization of Business challenging? The Level of Technology Domestic Economic Climate The capacity to invest in plants and Domestic Competition • Technical expertisePolitical may notDecision be available facilities, either in domestic or foreign Eastman Kodak at dominated the U.S film market and could a level necessary for product support. For e.g. The U.S. Government placed a markets, to a largeprofit extent a function of depend onisachieving goals that provided capital • The general population may not have to an Libya to condemn total ban on trade with the domestic economic vitality. If Political & Legal Issues invest in foreignadequate markets. level Without having toknowledge worry about of technical Libyan support forto terrorists’ attacks, economic conditions deteriorate, The issues abroad are often amplified by the “alien status” the company’s lucrative base, management had the time properly maintain equipment. imposed restrictions ontotrade with South against foreign investment of the company. 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As importance of routineallies. maintenance is the international In eachprejudiced case seen as an exploiter and receive result, Kodak had a direct energy and the resources back or unfair understood and carried out. operations of United State’s companies treatment at the hands the home local authorities. to the United States. Competitive withinof their whether it was IBM, Exxon were restricted country affects a company’s domestic as well as by these political decisions. international plans. The difference between IB and in-country business: Financial ( currency conversion ) ; Legislative ; Cultural ; Resource ( natural, human ) . т Why do Companies engage in International Business? Acquire Resources: Manufacturers and Social changes: when consumer behavior distributors seek out products, services Expand Sales changed (for example, you’ve a fast-food and components produced in foreign Many of the world’s largest companies restaurant, but last yearalso in your countries. They look country for foreign over half of their sales from outside was a big propaganda of healthy way ofderive they when is an overwhelming capital, technologies and Competition: information their home country. These companies living, so to loseSometimes moneyamount andthey have of close in domestic canyou usestart at home. use thiscompetitors include BASF [Germany], Electrolux to search for newtheir clients on aFor new market market and your business is loosing profit, to reduce costs. example, Disney [Sweden], Gillette United States], so to maintain have[The to enter relies on cheap manufacturing bases in it you Nestle market China & Taiwan to supplyanother clothing to its[Switzerland], Phillips [Netherlands] & Sony [Japan]. However, souvenir outlets. smaller companies may also depend on Technological changes: instance, when Also, Disney buysfor from the U.K.’s Stafford foreign has sales. They make sales of high-tech company working in a the home Shire Tableware because company to larger companies, which in countrydeveloped understand that technology oncomponents automated techniques for sell finished products abroad. which their business is based much more putting complicated patterns onturn mugs, developed in anouther regions and they which Disney sells in its outlets. have much more opportunities there - markets expansion; Acquisition of resources; Competition; Technological changes ; Social changes ; Task 2.1. Russian entrepreneur engaged in buying clothes abroad, for example in China and selling it on the territory of Russia. Determine whether the activity is part of the international business and the company international company? Task 2.2. The Japanese company has built a plant for the production of cars in the Russian Federation. Plant staff is almost entirely Russian except for a few senior management positions. Production is focused on the Russian market. Determine whether this is an international Japanese company and whether it is an international business, justify your answer involved? Task 2.3. Russian company X and the foreign firm Y founded a joint venture Z in the Russian Federation. The company is engaged in manufacture and sale of household chemicals on the territory of Russia and CIS countries. On the basis of submitted information, the definition of an international business and its characteristics, determine whether company X is an international company and whether it is an international business, justify your answer involved. Which advantages foreign firm Y has from founding a joint venture Z with Russian company? Task 2.4. Nestle withdrew their products to the markets of other countries and, since 1875, delivered milk in 16 countries around the world. Unlike Nestle many US companies prefer to limit their business to national market, which led to the loss of lucrative financial opportunities. Determine which causes of the international business growth led to the current situation? Task 2.5. Wholesale US firms engaged in the supply of fruits and vegetables, buy bananas and coffee in South America, Japanese firms buy nuts in Canada, and the majority of firms from around the world make the purchase of the oil in the Middle East. Determine which reason for international business growth is considered in the example and let her performance? Task 2.6. Sony and Matsushita Electric companies have assembly plants in Malaysia, where the labor force is relatively low cost. Determine which reason for the growth of international business is considered in the example and let her performance? The incentives of foreign business in modern conditions include: • The increase in profit compared with the activity in the domestic national market ; • the impact of a large and powerful company ( for example, acting as its subcontractor ) ; • initiative of the government and international organizations (government loans in developed countries , or the support of international financial institutions) • adverse conditions in the domestic market , forcing companies to transfer their activities abroad. An example is the increase in costs associated with government regulation ( such as the federal and regional taxes , the cost of environmental protection measures in order to achieve compliance with national standards for the protection of the environment); • market size , natural resources and the availability of low-cost skilled labor and "human capital" - highly skilled engineers and scientists in the receiving country . • risk sharing ( for example, when entering the market with new products ) . In this case, it is advisable to share the risks with a foreign partner ; • the possibility of obtaining new foreign technology , foreign capital and experience of the organization’ production and marketing ; • maintain the level of competitiveness by entering the sphere of foreign economic activity; • use of financial capacity (of low bank interest rates , funds and loans from local , foreign and international organizations ) of the host country ; • preferential tax treatment abroad , allowing to increase the competitiveness of export goods in the conditions of growing competition in the global market . Driving up the decision on the feasibility of entering firms in the sphere of foreign economic activity Does the global market demand for company’s product? yes Can the company’s product adapt to the demand abroad? no yes no Is investment climate favorable in the host country for the import? yes Whether the company has ability to act abroad? no yes The company decides to enter the external economic markets. The company decides to stay on domestic market no Risks in foreign trade activities: Risk - capacity of entrepreneurs’ loss of their resources , revenue , or the appearance of additional costs as a result of some events . Risk factors are divided into : Subjective; Objective. Objective factors Factors independent of the firms: inflation, competition, political and economical crisis, Сustoms duties and other restrictions etc. Subjective factors Factors dependent on the firms: Production potential, Technical risk Labour organization, Level of performance and safety, Professionalism of all the staff and etc. LECTURE 2 Periods of IB development т 1. The commercial era 2. The expansion era 3. The era of concessions 4. The era of nation-states 5. The globalization Era The commercial Era 1500-1850 • The era of great geographical discoveries; • The prospect of the huge tradebenefits in colonial goods in Europe - a driving force of IB; • In parallel industry is developing a large support of IB - from investment and credit , to the logistics infrastructure ( storage, transport ). т The expansion era 1850-1914 • The final formation and structuring of colonial empires on the background of the rapid industrial development of the European countries and the United States . • The character of "usefulness" of the colonies . • Formulated the main reasons for the existence and development of the IB : т Using resources more efficiently ( low cost and quality) ; The expansion of markets ; Finding new applications available financial resources; The use of the opportunities offered by the local legal systems The era of concessions 1914-1945 • The changing role of the • Internationalization largest companies of world labor • Formation of middle market . managers from the local • Sharping population . competition in the • Germany's defeat in World world markets of raw War I and the redistribution of materials , semimarkets . finished and finished • The Great Depression 1929products . 1932 . The era of nation-states 1945-1970 • Formation and the rapid • Breakthrough to development many new multinational nation-states. businesses of powerful • The development of American corporations . international capital markets , the emergence of • Formation of a complex three- layer structure of a new set of financial international business. instruments , the growth of • The increase in number international audit and of MNCs consulting sphere . т The globalization Era since 70 –s ХХ. • The revolution in information technology and powerful development of telecommunications technology have changed the traditional business , leading them to a qualitatively new level . • International economic relations have covered almost all of the country and the economy of each to a greater or lesser extent dependent on international business. т What Is Globalization? Globalization refers to the shift toward a more integrated and interdependent world economy. Globalization has several facets, including the globalization of markets and the globalization of production. THE GLOBALIZATION OF MARKETS • The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. Typical of these is Hytech, a New York-based manufacturer of solar panels that generates 40 percent of its $3 million in annual sales from exports to five countries, or B&S Aircraft Alloys, another New York company whose exports account for 40 percent of its $8 million annual revenues. A company does not have to be the size of these multinational giants to facilitate, and benefit from, the globalization of markets. In the United States, for example, nearly 90 percent of firms that export are small businesses employing less than 100 people, and their share of total U.S. exports has grown steadily over the past decade to now exceed 20 percent.6 Firms with less than 500 employees accounted for 97 percent of all U.S. exporters and almost 30 percent of all exports by value. Despite the global prevalence of Citigroup credit cards, McDonald's hamburgers, Starbucks coffee, and IKEA stores, it is important not to push too far the view that national markets are giving way to the global market. However, significant differences still exist among national markets along many relevant dimensions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, business systems, and legal regulations. The most global markets: • aluminum, oil, and wheat; • for industrial products such as microprocessors, DRAMs {computer memory chips), and commercial jet aircraft; • for computer software; • and for financial assets. Global rivalries: THE GLOBALIZATION OF PRODUCTION • refers to the sourcing of goods and services from locations aroundConsider the globe to take Boeing's 777, a commercial jet Eight Japanese make parts advantage of nationalairliner. differences insuppliers the cost for the fuselage, doors, and wings; a supplier and quality of factors inofSingapore production (such asnose makes the doors for the landing gear; three suppliers in Italy labor, energy, land, and capital) manufacture wing flaps; and so on. In total, some 30 percent of the 777, by value, is built by foreign companies. For its most recent jet airliner, the 787, Boeing has pushed this trend even further; some 65 percent of the total value of the aircraft is outsourced to foreign companies, 35 percent of which goes to three major Japanese companies. The Emergence of Global Institutions • General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO); • the International Monetary Fund (IMF) and its sister institution, the World Bank; • and the United Nations (UN). Drivers of Globalization 1) decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II 2) technological change, particularly the dramatic developments in recent decades in communication, information processing, and transportation technologies. DECLINING TRADE AND INVESTMENT BARRIERS During the 1920s and 30s many of the world's nationstates erected formidable barriers to international trade and foreign direct investment. One consequence, however, was "beggar thy neighbor” trade policies, with countries progressively raising trade barriers against each other. Ultimately, this depressed world demand and contributed to the Great Depression of the 1930s. The goal of removing trade barriers was enshrined in the General Agreement on Tariffs and Trade (GATT). The Uruguay Round further reduced trade barriers; extended GATT to cover services as well as manufactured goods; provided enhanced protection for patents, trademarks, and copyrights; and established the World Trade Organization to police the international trading system. Average tariff rates for manufactured goods 1913 1950 1990 2010 France 21% 18% 5.9% 3.9% Germany 20% 25% 5.9% 3.9% Italy 18% 25% 5.9% 3.9% Japan 30% - 5.3% 2.3% Holland 5% 11% 5.9% 3.9% Sweden 20% 9% 4.4% 3.9% Great Britain - 23% 5.9% 3.9% United States 44% 14% 4.8% 3.2% According to the United Nations, some 90 percent of the 2,700 changes made worldwide between 1992 and 2009 in the laws governing foreign direct investment created a more favorable environment for FDI. Such trends have been driving both the globalization of markets and the globalization of production. This is true in Japan, where U.S. companies such as Apple and Procter & Gamble are expanding their presence. The globalization of markets and production and And it is true in Europe, where the oncedominant Dutch company Philips has the resulting growth of seen world trade, foreign direct its market share in the consumer investment, andbyimports electronics industry taken Japan's JVC,all imply that firms are Matsushita, Sony,home and Korea's finding and their markets under attack from Samsung and LG. foreign competitors. It is true in the United States, where Japanese automobile firms have taken market share away from General Motors and Ford (although there are signs that this trend is now reversing). Since the end of World War II, the world has seen major advances in communication, information processing, and transportation technology, including the explosive emergence of the Internet and World Wide Web. the low cost of airfreight, Dell can Implications for theGiven Globalization of use air transportation to speed up the delivery of critical components to meet Production unanticipated demand shifts without For •example, Dell uses the Internet to transportation costs coordinate and control a globally dispersed production system to such an • information processing extent that it holds only three days' worth of inventory at its assembly locations. Dell's Internet-based system records orders for computer equipment as they are submitted by customers via the company's website, then immediately transmits the resulting orders for components to various suppliers around the world, which have a real-time look at Dell's order flow and can adjust their production schedules accordingly. delaying the shipment of final product to consumers. and communication Dell also has used modem communications technology to outsource its customer service operations to India. When U.S. customers call Dell with a service inquiry, they are routed to Bangalore in India, where Englishspeaking service personnel handle the call. Implications for the Globalization of Markets For example, due to the tumbling costs of shipping goods by air, roses grown in Ecuador can be cut and two days later sold in New York. This has given rise to an industry in Ecuador that did not exist 20 years ago and now supplies a global market for roses. In addition, low-cost jet travel has resulted in the mass movement of people between countries. At the same time, global communication networks and global media are creating a worldwide culture. U.S. television networks such as CNN, MTV, and HBO are now received in many countries, and Hollywood films are shown the world over. It is now as easy to find a McDonald's restaurant in Tokyo as it is in New York, to buy an iPod in Rio as it is in Berlin, and to buy Gap jeans in Paris as it is in San Francisco. Despite these trends, a firm that ignores differences between countries does so at its peril.