INTRODUCTION TO INTERNATIONAL BUSINESS

WHAT IS INTERNATIONAL BUSINESS?

ANY BUSINESS ACTIVITY THAT TAKES PLACE THROUGH NATIONAL BORDERS THE EXCHANGE OF GOODS AND SERVICES BETWEEN INDIVIDUALS, ENTERPRISES, ORGANIZATIONS AND GOVERNMENTS FROM DIFFERENT COUNTRIES. HBR Business Dictionary INTERNATIONAL BUSINESS ARE THE COMMERCIAL TRANSACTIONS (INCLUDING SALES, INVESTMENTS AND TRANSPORTATION) THAT TAKE PLACE BETWEEN INDIVIDUALS, ORGANIZATIONS, INSTITUTIONS AND GOVERNMENTS FROM TWO OR MORE COUNTRIES. John Daniels

HISTORICALLY.
International business are not something new:
1550-300 b.c..

3100-539 b.c.. Mesopothamia Phoenicia Greece 500 b.c..330 a.d.

Trade routes in the Mediterranean Sea

England Spain Netherlands Trade routes to American and Asian Colonies

INDUSTRIAL REVOLUTION
Increase of production levels (mass production) and the efficiency of raw materials facilitating international business

WHY? INDUSTRIALIZATION

INCREASE IN THE DEMAND OF SUPPLIES INCREASE IN THE AVAILABILITY OF RAW MATERIALS

INCREASE FACILITY OF TRANSPORTATION

INCREASE IN THE MOBILITY OF CAPITAL FLOWS,
PROMOTING REVENUES AND NEW INVESTMENTS BOTH IN THE COLONIES AND IN DOMESTIC EUROPEAN MARKETS.

INVESTMENT IN DOMESTIC PRODUCTION

INCREASE MOBILITY OF REVENUES AND CAPITAL FLOWS

INCREASE OF PRODUCTION CAPACITY

AVAILABILITY OF NEW RESOURCES

INCREASE IN THE AVAILABILITY OF PRODUCTS

INCREASE OF REVENUES

INDUSTRIAL REVOLUTION

T E C H N O LO G Y

TECHNOLOGY ADVANCES ARE THE GREATEST ACCELERATOR OF INTERNATIONAL BUSINESS Towards 1880 the Industrial Revolution peaks, both in Europe as in the United States. The productions of goods grew to high levels, pushing the creation and discovery of new inventions and scientific advances, the development of new energy sources , increases in the efficiency levels of production processes and better communication and transportation.

 Development and production of electricity

commercial

Development and commercial production of gasoline automobiles (Karl Benz, Gottlieb Daimler & Maybach) First comercial production and sales of phonographs and phonographic recordings
First structures of steel for sky-scrapers
Ferdinand de Lesseps

Home Insurance Building, Chicago, 1894

A French company starts the construction of the Panama Cana.

DEVELOPMENT OF INTERNATIONAL MARKETS

International Markets
Domestic Market demand fully covered

DOMESTIC PRODUCTION

WHY DO COMPANIES START BECOMING GLOBAL? Faster transportation

Communications allow long-distance control Transportation and communication costs are lower, therefore facilitating international operations internacionales

GLOBALIZATION, INTERNACIONALIZATION, TRANSNACIONALIZATION... Exchangable terms, but they are not the same

INTERNATIONAL BUSINESS

CREATION OF MULTINATIONAL ENTERPRISES

After the Industrial Revolution, a new kind of economic entity is born, with the objective of doing INTERNATIONAL BUSINESS

1- Internationalization

When exports start growing faster than the GDP (% of exports grows faster than production: the market is requesting products faster than you can produce them)

2- Transnationalization

FDI processes start and relocation is more and more common

3- Globalization

World wide networks of information and production

Multinational corporations came to be at the end of the 19th. And the beginning of the 20th. centuries

From the beginning they had different and defined objectives: 1) PLACE EXCESSIVE DOMESTIC PRODUCTION
(Singer, International Harvester Navistar, Remington, etc.)

2) GET RAW MATERIALS ABROAD TO SATISFY THEIR DOMESTIC DEMAND

(Standard Oil, US Rubber Co. , United Fruit, etc.)

3) TECHNOLOGY MNES THAT ARE LOOKING FOR MAKETS FOR THEIR NEW PRODUCTOSS (KODAK, WESTINGHOUSE, SONY, APPLE, ETC.)

HOW DO YOU DO INTERNATIONAL BUSINESS?

Forms of International Business

Exports-Imports

Direct Investment
Financial (portfolio) investments Franchising and License agreements

Turn-key projects

1. Exports and Imports

Is the internationalization process that requires the lesser level of commitment and effort from the company, in terms of the resources needed to service a foreign market. Basically, the company starts using its installed production, managerial and distribution capacities, allocating portions of its production to the target foreign market. It produces locally and then sends its products across its countrys borders. Quite frequently exports start as a fluke - an order placed by a new client. At other times, the company identifies an opportunity in a foreign market and takes action to introduce its products into it. Direct Exporter = The company is in charge of all aspects of the sale and transportation of the merchandise to the new foreign client (it sells directly to the foreign buyer) Indirect Exporter = The company hires an expert to facilitate the exchange of its products. There are different types of facilitators: exports agents, foreign representatives, brockers, etc.

2. Foreing Direct Investment

A company invests directly in a foreign country, committing capital, personnel, infrastructure, etc.
Foreign Investment = property outside domestic borders in exchange for a financial revenue (interests and dividends) It gives the investor a controlling interest in a foreign corporation. It does not have to be a 100% It is done to gain access to foreign markets, foreign resources or to own a property abroad.

3. Financial (portfolio) investments

Claim in a company, but no control over it. Ownership of financial titles of corporations, credit, etc. It can be done buying shares of a corporation or buying debt (bonds, IOUs, etc.
It gives you financial gains in the short term.

4. Liscensing

It is the process through which the licensor gives the licensee some sort of intangible right such as the use of a process, a patent, a program, a brand, etc. The Licence can or can not be exclusive. Its advantages are: FOR THE LISCENSOR: a. It receives the additional revenues; b. It gives him the possibility of extending the life of a product; c. it increases its revenues by licensing other assets different from its products and d. has the possibility of becoming a supplier of spare parts, thus increasing even more its revenues.

FOR THE LICENSEE: a. it acquires the rights over a technology that allows him to avoid Research and development (R&D) expenses

4. Franchising

Is the practice of using another firm's successful business

model.

The franchiser escorts the franchisee in the operation of the franchise, providing raw material, training, infrastructure, etc. Generally the franchiser has more control over the quality of the product than the licensor. Businesses for which franchising work best have the following characteristics:

Businesses with a good track record of profitability.

Businesses which are easily duplicated.

5. Turn-key Operations

Type of project that is constructed by a developer and sold or turned over to a buyer in a ready-to-use condition.

The owner organizes the overall project with a turnkey firm and 'receives' the project on its completion and can then start to operate it.

TYPES OF MULTINATIONAL CORPORATIONS

TYPES OF MULTINATIONAL CORPORATIONS

As International Businesses started developing, specializing and getting more and more complicated, experts have defined different types of Multinational Corporations:

INTERNATIONAL CORPORATIONS Those that have operations outside their national borders

MULTINATIONAL CORPORATIONS (MNCS OR MNES) Any company that has production or marketing operations in more than one country This companies have a global view of markets and foreign production. They are willing to consider manufacturing and marketing of their products in any location of the world.

TRANSNATIONAL CORPORATION (TNC) Companies that are owned and managed by nationals of different countries. Companies that have different capacities and abilities around the world, but they develop and integrate their world-wide operations.

GLOBAL CORPORATION Globally-integrated corporations. Companies that integrate operaations from different locations around the world, but has a home-base strategic decission making process

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Company Wal-Mart Stores Royal Dutch Shell Exxon Mobil BP Toyota Motor Japan Post Holdings Sinopec State Grid AXA China National Petroleum Chevron ING Group General Electric Total Bank of America Corp. Volkswagen ConocoPhillips BNP Paribas Assicurazioni Generali Allianz AT&T Carrefour Ford Motor ENI J.P. Morgan Chase & Co.

Revenues ($ millions) 408,214 285,129 284,650 246,138 204,106 202,196 187,518 184,496 175,257 165,496 163,527 163,204 156,779 155,887 150,450 146,205 139,515 130,708 126,012 125,999 123,018 121,452 118,308 117,235 115,632

Profits ($ millions) 14,335 12,518 19,280 16,578 2,256 4,849 5,756 -343 5,012 10,272 10,483 -1,300 11,025 11,741 6,276 1,334 4,858 8,106 1,820 5,973 12,535 454 2,717 6,070 11,728

Source: Fortune 500 2010 Biggest Multinationals

ADVANTAGES AND DISADVANTAGES OF MULTINATIONAL CORPORATIONS

The success of a multinational corporation is based in knowing how to overcome its disadvantages and seize its advantages

Advantages and Disadvantages of MNCS

The success of MNCs lies in its ability to overcome disadvantages and seize its advantages. Advantages:

1) Higher technical knowledge: Maybe the most important advantage of a MNC. The technical know-how they possess gives the international competitiveness. The biggest MNCs have access to high-tech advances, either their own developments or acquired, in production, management, processes or services. The ability to apply these technologies give the MNC a competitive advantage in international markets, that translate in high technological level products, low prices and efficient production.

ADVANTAGES
2) Bigger size and economies of scale:

Most of MNCs are big companies, some of them (Wal-Mart or ExxonMobil) have sales bigger than the GDPs of many countries.
This allow them to create economies of scale since the volume of production decreases fixed costs per unit, that impacts the final consumer price. This situation is clearly observed in capital intensive sectors such as steel, petrochemicals and automobiles)

R+D

Increased resources for R+D

Increased production

ECONOMIES OF SCALE

Higher revenues

Lower the cost of products

Increased sales

ADVANTAGES
3) Decreasing prices in raw materials.

The bigger size of MNEs and their level of production makes them acquire bigger quantities of supplies and raw materials, and this gives them the chance to get lower prices and discounts.

ADVANTAGES
4) Ability of getting supplies virtually anywhere in the world. Aside from better prices, their size and production volume allows them to create monopolies of raw materials, offering technology in exchange for exclusive access to those raw materials.

ADVANTAGES
5) Creation of economies of scale regarding transportation, distribution and promotion.

Once again, the production volume allows the MNEs to negotiate better prices with providers of services.
In some cases, the size of the company allows it to cater to its own needs buying its own ships, establishing its own distribution channels, etc. This translate in the final costs of their products, usually lowering them. Nowadays, the tendency is to standardize services like promos, commercials, etc. For example: global advertising campaigns, regional campaigns, eliminating the need to tropicalize (adequate) ads and commercials.

6) Ability to move production abroad.

In order to increase their competitiveness, MNCs have the ability to relocate their production outside their national borders, seizing the advantages offered by low production costs and low prices of raw materials and supplies. In many cases, they seize the benefits offered by foreign governments that are eager to attract foreign direct investments. Sometimes this benefits are not accessible to domestic companies, or are not offered in the home country of the MNE.

Some of the most attractive countries to relocate MNEs are: China, Brazil, India, Indonesia and Mexico.

ADVANTAGES
7) Brand Recognition and good name:

Lines of products can have specific advantages derived from international brand recognition and reputation in regards to quality, value and service.
International reputation helps MNCs get into new markets a lot easier and increase its prices based on the good name of its brand, since consumers are already convinced of the quality of said brand.

ADVANTAGES
8) Access to low-cost financing:
Usually, a MNC has good credit records, which makes them favored clients for financial institutions.

MNCs can access preferential financing in different countries, according to its own convenience.

ADVANTAGES
9) Financial flexibility:
MNCs can manipulate their earnings and move them to locations that have more favorable revenue laws (Luxembourg, Cayman Islands, etc.)

ADVANTAGES
10) Advantages derived from better access to key information
MNCs usually have a global vision of the market and the ability and resources to gather, process analyze and exploit information from many different sources and locations. This allows them to create strategies aimed to overcome obstacles sometimes before they actually appear (commercial intelligence, government/politics related information, political risks analysis, etc. )

ADVANTAGES
11) Global access to managerial expertise:

Because MNCs work simultaneously in many countries, they have the ability to absorb the managerial experience in a global way, adopting the best practices of each location. At the same time, its executives and managers acquire a global view of entrepreneurial activities and are better equipped to face cultural differences, stress and company crisis.

ADVANTAGES
12) Diversification of Risks: The simultaneous presence of an MNC in many countries at once allows them to face more efficiently the economic cycles, that generally dont present themselves everywhere at once. They are able to diversify the political, economic, social risks entailed by their operation.

DISADVANTAGES
1)Business Risks: MNCs have to face risks that naturally arise from doing business in several currencies. This makes them more vulnerable to currency fluctuation. Most MNCs use mechanisms such as currency swap to minimize short-term currency exchange risks.

DISADVANTAGES
2) Local regulations

MNCs are bind by the regulations of each individual country in which they operate. Most of these regulations differ from one country to the next, so MNCs specially at the beginning of their operations have to become familiar with laws and rulings, as well as with the ways to make business particular to each location, many times they have to modify or change the way they usually operate.

DISADVANTAGES
3) Differences regarding laws and law enforcement: The MNC has to operate under different legal systems. In many cases the degree of legal certainty is quite law, judicial processes are slow and complicated and even some practices that are normal in the home country may be forbidden in a foreign location.

DISADVANTAGES
4) Political Risks:
There is very little an MNC can do if the host country is bound to act against it or its operations. The political risk increases in countries where governments are unstable or change frequently, as well as with extremists.

DISADVANTAGES
5) Difficulties with the operation

MNCs operate in a multitude of business environments, thus increasing the difficulties of their overall operations: they may face strange or unknown customs and business practices with which they are not familiar.
The MNC most adjust its corporate culture to the culture of the host country or risks losing business

6) Cultural differences: They are the cause of the biggest, toughest problems in International businesses. Many MNCs find that their expatriate executives are less efficient because they can not adjust to the local culture, either professionally or personally, and local executives have problems communicating inside

The decreased ability to understand and respond to local culture could mean the failure of the business. Lack of knowledge and understanding of local culture, local business ethics, social rules, etc. means problems with local clients, authorities and employees.

FIRST RESEARCH ASSIGNMENT

Due Date: MONDAY, AUG. 29TH. WEDNESDAY, AUG. 31ST THURSDAY, SEPT. 1ST.

Topic.: International Business and Multinational Corporations Activities: 1. Research practical examples (cases) regarding each type of International Businesses, including: NAME OF THE CORPORATION, BRIEF HISTORICAL ANALYSIS OF ITS INTERNATIONALIZATION PROCESS, RESULTS, CONCLUSSIONS. 2. Research ONE EXAMPLE that shows each advantage and disadvantage of multinational corporations, including: NAME OF THE COMPANY, BRIEF HISTORICAL ANALYSIS, ADVANTAGE OR DISADVANTAGE OF THE CORPORATION, WAY IT WAS SEIZED OR OVERCAME, RESULTS, CONCLUSSIONS On the due date, each team will present one type of international business and one advantage ordisadvantage randomly selected by the teacher.

PRIMER TRABAJO DE INVESTIGACIN Y CONSOLIDACIN TEMTICA

Fecha de Entrega: LUNES 29 DE AGOSTO MIERCOLES 31 DE AGOSTO JUEVES 1 DE SEPTIEMBRE

Tema: Negocios Internacionales y Empresas Multinacionales Actividad: 1. Realizar una investigacin sobre casos prcticos de cada uno de los tipos de negocios internacionales sealando: NOMBRE DE LA EMPRESA, BREVE ANALISIS HISTRICO DE SU PROCESO DE INTERNACIONALIZACIN, RESULTADOS, CONCLUSIONES 2. Investigar 1 caso real que ejemplifique cada una de las ventajas y desventajas de las empresas multinacionales sealando: NOMBRE DE LA EMPRESA, BREVE HISTORIA, EXPOSICIN DE LA VENTAJA O DESVENTAJA, FORMA EN LA QUE SE ATAC, RESULTADOS, CONCLUSIONES Las actividades se realizarn en equipos de 5 personas. El da de la entrega del trabajo, cada equipo expondr un tipo de negocio internacional, una ventaja y una desventaja, que sern seleccionadas aleatoriamente por la maestra.