Global Business Environment: Going Global to Stay Local?

Lecture 1

The Course
Why the need for firms to go global? Global Business Environment, trends in key indicators The Current Scenario in Trade and Investment theories and experience Evolution of International Institutions and their role in ensuring Global Business Environment Lessons from the Growth Experience across countries / sectors what defies or defines success? Which countries to do business in? 1. The Political Economy whats a perfect recipe for success? 2. Soft factors role of Culture etc. 3. Operational issues: Trade Finance, Global Sourcing 4. Control factor in international business

The References
International Business by Daniels, Radebaugh, Sullivan and Salwan, Pearson International Business by Hill and Jain, Tata Mcgraw-Hill International Business by Czinkota, Ronkainen and Moffett, Wiley World bank, IMF, UNCTAD and WTO Webresources Recent happenings on international business issues

Evaluation Pattern and Schedule

Component Class Participation Quiz (Best Two out of three) Group Project Report Presentation End Term Examination Session No 3 Weight 10 20 30 40 Quizzes and Project Report Quiz No 1

6
9

Quiz No. 2
Quiz No. 3

End Term Examination

Submission of Group Project Report

What is International Business?

All commercial transactions between two or more countries (merchandise sales, service contracts, investments, business, transportation) Private (for profits) Public (for political / strategic reasons) International business and globalization Globalization: The broadening set of interdependent relationships among people from different parts of a world that happens to be divided into nations IPL, ATP Tours and Football Leagues: Sports or Business?

Difference between Domestic and International Business

In additional to domestic business management skills, international business management requires

Social science understanding Political science appreciation Legal awareness (taxation, forex transaction) And an innate ability in:
Anthropology (aspirations and demands) Sociology Psychology (motivations) Economics (GDP, inflation, unemployment) Political Economy (sanctions and terrorism) Geography (supply and demand factors)

How is International business affected by: GDP Growth? Oil Price Movement?

Growing Income? Growing Trade in Goods and Services? Deepened Production Networks? Lowering Trade Barriers and Procedural Hassles? Growing Global Governance? Increasing Cross-Regional Association? Deepened Investment Inter-linkage? More Acquisitions and Mergers? Increasing International Cooperation in Infrastructure Projects? Movement of Technicians / Managers from another country? Movement of workers from another country? No to the policy of Self-Reliance?
Motivation for consumers: More variety, better quality, lower prices So how does a globalized product looks like?

What defines Globalization?

The International Burger

Sesame seeds from Mexico Pickles and Sauce from Germany Onions from US Lettuce from Ukraine Cheese from Poland

Bun from Russia

Beef Patties from Hungary

Source: Czinkota et al

The fragmentation of production: The example of the Boeing 787 Dreamliner

Source: WTO (2011)

Complementary parts supply system of an automobile assembler in ASEAN

Source: Hiratsuka (2010)

Global Canvas: GDP Growth

20

China
15

European Union

India

Japan

United States

10

2004

2008

2000

2001

2002

2003

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2009

1997

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1999

-5

-10

World Bank Data

China has established itself as a growing location: More FDI inflow What are the prospects of India? Does GDP growth influence ability to engage in international business?

2010

2011

Recession and Global FDI (US $ Bn.)

WIR (2012)

Growth in Global Export (Merchandise)

50 40

India

World

30

20

10

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1991 1990 1992 1993 1994 1995 1996 1997 1998 1999 2010 2011

-10

-20

-30

How has Indias merchandise export suffered, due to imbalances in Global Market?

Growth in Global Export (Service)

70 60 50

India

World

40
30 20 10 0

2002

2005

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1991

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-10 -20

How has Indias service export suffered, due to imbalances in Global Market?

2010

2011

Who are the prominent exporters? Global Merchandise Export Market Share (%)
45.00
40.00

US China Japan

EU (27) India

35.00
30.00

25.00
20.00

15.00
10.00

5.00
0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

1991

1989

1990

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Is business / trade mainly created by Price difference??

2010

2011

Who are the prominent exporters? Global Service Export Market Share (%)
60

China

EU

Japan

India

US

50

40

30

20

10

2006

2000

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2001

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What are the sources of competitiveness?

2010

2011

The Most Competitive Economies..

India was ranked 51st as per 2010-11 Ranking That worsened to 56th position during 2011-12 Does competitiveness gets affected by the ease of doing business? DBR 2012

Stronger legal institutions and property rights protections are associated with more efficient regulatory processes (Average ranking on sets of Doing Business indicators)

DBR (2012)

Reasons for Growth in International Business

Rapid expansion of technology - New technology encouraged newer products and flexible specialization designed to produce differentiated products in large patches Fixed cost is much less important as compared to 1980s (e.g. electronic components industry) Capturing Economies of Scale Targeting the Global Market Bulk production in low-skilled products China produced 45% shoes of the World Transportation is quicker while costs are lower - Reduction in physical cost of transport containerization, packaging, Miniaturization bulkiness reduced creation of newer markets (e.g. perishables through air cargo) Communication enables control from afar - Reduction in communication cost internet and mobile phones Tirupur in India Liberal government policies on trade and resources movement of capital and labour reform of sea and airports and customs framework

Reasons for Growth in International Business ..

Emergence of services supporting international business banking services, postal and courier services Development of institutions that support international trade, WTO-induced reform reduction in tariff level Consumer pressures (demand for quality features, e-commerce, lookout for cheaper deals) Increased global competition - Need to Stay Competitive even in the Local Market cost innovations, Merger and Acquisitions Growing Intra-Industry Trade The Need to Source the Input at the Best Competitive Price and Quality Where and How to Source? Exploitation of key inter-linkages Product Cycle Hypothesis Quick Learning for the New Entrants Reduction in Storage cost Just-In-Time mode so no need to book the warehouse for 3-4 weeks (precondition: credibility in providing)

e.g. Integrated Production Network in Southeast Asia for automobile

Why Engage in International Business?

Expand sales Acquire resources
Volkswagen (Germany); Ericsson (Sweden); IBM (US)

Minimize risk

Better components, services, products (Tata Steel willing to set up iron ore or steel mill projects in western Australia given the natural reserve in that territory; BPO industries in India and Philippines) Foreign capital Cheap labour (Rawlings producing baseball in Costa Rica) Technologies (Tata Steel purchase of Corus) Information (Zodiac Shirt purchase of European and American Brands)
Take advantage of the business cycle for products / services Diversify among international markets
The More people view the Harry Potter Movie, the higher the sales and profitability.

A Globalized Venture: Harry Potter

Category Author Producer Distributor Director Screenplay Editing Music Person - Country of Origin J. K. Rowling (British) David Jonathan Heyman (British) Warner Brothers (US) Christopher Joseph Columbus (US); Alfonso Cuarn Orozco (Mexico) Stephen Keith Kloves (US); Michael Goldenberg (US) Richard Francis-Bruce (Australia) Patrick Doyle (Scotland)

Visual Effects
Actors Location Question 1

Rising Sun Pictures (Australia); Double Negative (UK); Cinesite (UK); Industrial Light & Magic (US)
From more than 20 countries UK, Scotland Why simultaneous multiple release of the Movie?

Question 2

Why the recent movies were released in 3D?

And how the countries Gain?

Lord of the Rings Filming locations in New Zealand are now great tourist attractions

Auckland Airport

Modes of International Business

Importing (Reliance Industries Limited importing crude oil from Gulf) and exporting (Tata Motors exporting Nano to Sri Lanka) Tourism and transportation Licensing (e.g. Breyers Yogart, TGI Friday's frozen appetizers produced by unrelated firms under licensing arrangements, Arvind Brnads and Wrangler in India) and franchising (e.g. Subway, McDonalds, Seven-Eleven etc.) Licensing / Franchising - Royalties, operating standard and use of brand names Turnkey operations - seller agrees to put up the plant or business, with his own financing without initial backing from the buyer, guaranteed to be paid by the buyer only upon delivery of the fully operational installation, occurs in franchising Bechtel in Afghanistan. Management contracts persons undertaking certain specialized management functions in another entity (Disney theme parks in Paris) Direct (Honda investing in Indian subsidiary Honda-SIEL Cars India) and portfolio investment (Foreign Institutional Investors in the Stock Market)

International Strategy Lifecycle

Selling Products or Services Outside a Firms Domestic Market

2 1
Firm Introduces Innovation in Domestic Market

Product Demand Develops and Firm Exports Products

Foreign Competition Begins Production

Production Becomes Standardized and is Relocated to Low Cost Countries Production Abroad

4 Firm Begins

Pattern of Internationalization

Greater reach abroad is also characterized by greater demand for quality service, if needed, by global players

Global Business: Bharti Airtel

Bharti Airtel has outsourced all of its business operations except marketing, sales and finance. Its network base stations, microwave links, etc.is maintained by Ericsson, Nokia Siemens Network and Huawei Business support is provided by IBM Transmission towers are maintained by Bharti Infratel Ltd. (in India) In March 2010, Bharti struck a US $ 9 Bn. deal to buy the Kuwait firm Zain's mobile operations in 15 African countries

 How can a firm develop to become a global player? First step: Sourcing Capital availability in Developed countries the role of the Global Banks Headquarter How can developing countries be able to grow? Second step: Sourcing Labour - Developing countries securing skilled and unskilled labour, considerations on infrastructure, human capital etc. Or, the other way round? Can cheap labour come to domestic country and ensure production? Example Bangladesh Garments Industry - local labour Korean FDI Californian Tomato industry Mexican labour
What happens in South East Asia and why India has a different experience?

The Location choice of MNCs?

Role of FDI: Flying Geese Model

Production - export FDI - import. First wave of FDI from Japan to South Korea, Taiwan, Hong Kong and Singapore (NIEs). NIEs turned into efficient producers of manufactured products. Consequent increase in cost of production. Second wave of FDI from South Korea and Taiwan to Thailand, Malaysia and Indonesia. Japanese investment also followed. Sectoral perspective move towards more techno-intensive sectors. China benefited in the process during 1980s. Flow to Philippines in next period. Process suffered during East Asian Crisis. Recent FDI flow to Cambodia, Lao PDR, Viet Nam.

Importance of being at the right place at the right time

Sequential flying geese paradigm

Sequential flying geese paradigm ..

Is FDI all about manufacturing and services?

Nestl (Switzerland) had contracts with more than 600,000 farms in over 80 developing and transition economies as direct suppliers of various agricultural commodities. Olam (Singapore) has a globally spread contract farming network with approximately 200,000 suppliers in 60 countries (most of them developing countries). In Brazil, 75% of poultry production and 35% of soya bean production are sourced through contract farming, including by TNCs. Sime Darby (Malaysia): $800 million investment in plantations in Liberia in 2009 (palm oil, rubber). China: investments and contract farming in commodities like maize, sugar and rubber in the Mekong region, especially in Cambodia and Lao PDR. Zambeef (Zambia): investment in Ghana and Nigeria. Grupo Bimbo (Mexico): investment across Latin America and the Caribbean (potato, cereals). Food security led investment: South Korea and GCC Countries.
Role of SWFs: Agricapital (a State-owned fund based in Bahrain) is investing in food crops overseas to support its governments food security policies.

Agri FDI: Recent Trends

Policy Issue for a country: Export Promotion or Import Substitution?

X or M?

www.abanet.org

How to Predict Trade and Development Policy Reforms in a country?

Late entry and industrial structure Infant Industry and Optimum Tariff Argument Demographic Pressure (increasing population, import demand) Military Compulsions (technological innovations, increasing government expenditure) Export Growth (broadening product base, increasing productivity, competitiveness of the economy / select product groups) Demonstration Effect (consumerism, increased consumption)

 A visionary leader? (e.g. Lee Kuan Yew, Singapore; Deng Xiaoping, Peoples Republic of China; Suharto, Indonesia) Valuable exportable commodity? (e.g. oil in Iran; manufacturing in China) Unpredictable aggressive enemy? (e.g. China for Taiwan; Russia for China) Superpower patron? (e.g. US as patron for Singapore and Taiwan during 1970s and 1980s) Fair Trade Regime? (e.g. Chewing gum export in Singapore) Business-Friendly Macroeconomic Regime? (difference between Democratic India, Chile under Augusto Jos Ramn Pinochet and China under Communist Party) How to Learn from Past Mistakes so as to prevent their repetition????
No matter if it is a white cat or a black cat; as long as it can catch mice, it is a good cat A Sichuan Proverb used by Deng became famous

Other factors for Growth?

Joint Venture (JV): two or three players from more than one country coming together to form a business e.g. Sony-Ericsson is a JV by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones; Walmart and Bharti Enterprises formed a JV, Bharti Walmart Private Limited. Multinational Enterprise (MNE): global approach to markets and production, direct investment in more than one country Multinational Corporation (MNC) e.g. Pepsi Transnational Company (TNC) - integrate various country operations while dispersing the location of control (Transnational strategy), e.g. Nokia, Nestle Globally integrated company: integrated operations located in different countries - integrate various country operations into an international headquarters control (Global Strategy) GE, Apple, Sony Multidomestic company: multinational companies that allow local responsiveness country offices have power to operate autonomously (Multidomestic strategy) e.g. McDonald and Maharaja Mac in India Nokia has a team of design researchers, psychologists, sociologists and usability experts who travel the globe exploring how people use their mobile devices, discovering how to make them better.

Levels / Terms of International Companies - Strategies

International Corporate Strategy

When is each strategy appropriate?
High

Need for Global Integration MultiDomestic

Low Low High

Need for Local Market Responsiveness

International Corporate Strategy

When is each strategy appropriate?
High

Global Strategy Need for Global Integration

MultiDomestic
Low Low High

Need for Local Market Responsiveness

International Corporate Strategy

When is each strategy appropriate?
High

Global Strategy
Need for Global Integration

Transnational

MultiDomestic
Low Low High

Need for Local Market Responsiveness

Why are some industries multidomestic?

Why the differences?

Customized products are needed in some countries National competitors are common Countries have unique distribution channels There are no or few economies of scale Local/national firms have some inherent advantages in the host country over global competitors

Why are some industries Global?

Homogenized product needs across markets Customers are global firms High R&D expenditures require more than one market to recover development costs There are many economies of scale in production, international logistics, or marketing The firm has global product differentiation, proprietary product technology, and production mobility.

Standardized vs Responsive Practices

Global standardization advantages
Reduced costs in development and manufacturing (e.g. Canon Digital Camera; Sony Flat Screen TV) Economies of scale since fixed costs are spread over more units of production

Responding to national preferences

Adjusting operating, marketing, and design to meet specific national preferences (e.g. Coca Cola marketing Stoney Tangawizi beer in Tanzania, Kenya where Tangawiki means ginger in Swahili; in US the product is sold as Stoney Gold Ginger beer).

Maximizing Global Profits

Profits are greatly influenced by:
International rivalry (e.g. Airbus backed by EU and Boeing backed by US) Cross-national treaties and agreements (UN, WTO, Trade, Transit, environment, health etc.) Ethics

National Cooperation / Problems

Treaties and agreements address a variety of commercial advantages (transportation, trade, etc)
To gain reciprocal advantages To attack problems that one country alone cannot solve To deal with concerns that lie outside the territory of all countries Trade barrier reduction (WTO) Convention on Transit Trade of Land-locked States (UN) International arbitration on investment disputes (World Bank) Knowledge networks (G8, G20, IBSA, BRICS) Often firms actively lobby with the governments for reciprocal market access Coercion (e.g. Suez Canal, Panama Canal) International conflicts (e.g. following independence of Eritrea in 1991, Ethiopia lost access to Red Sea and became a land-locked country)

Countries reluctantly cede some sovereignty / facility because of:

The Other Side of the Coin?

Increasing instability owing to International Events? (e.g. US decision to reduce outsourcing of services from India; Chinese decision to stop export of rare earth materials to Japan) Growth of a region linked more with the Growth scenario in other countries? (e.g. the 2009 recession in US and the impact on Chinese exports) Less Control of the Government to influence Domestic Policy Challenges? (e.g. the Greece crisis and failure to tackle the problem through Monetary and Fiscal Policies) Increasing Privatization? Worsening of Income Inequality and Employment Scenario? (e.g. experience of Sub-Saharan African countries) Greater influence by MNCs and external players on local population and production? e.g. environmental concerns Brazil and Amazonian forests; mining sector in Indonesia
Serious challenge to local players??

Global Recession and Commodity Prices

Major Commodity Price boom in 2008 for several , products. Move to Biofuel, Export bans, Prohibitive taxes etc., supply and demand mismatch Price crash in 2009 How Economic Boom and Recession affects international business? Domestic Policy Tightening Energy and Metal price recovery from March 2009, but longer time taken for agriculture. Commodity prices peaked in early 2011 and then declined on concerns about the global macroeconomic and financial outlook and slowing demand in emerging markets, notably China.

Biggest decreases: 1. Metals 2. Agriculture raw materials (cotton and rubber) 3. Edible oils 4. Coconut and palmkernel oil 5. Cocoa

Going Local?

Going Extinct ..

Local Soft Drinks in many countries are either driven out by aggressive pricing by MNC giants, Coke and Pepsi, or, bought / marginalized by them, e.g. Campa Cola in India Synthetic Fibre increasing Export from China over the years, increasing import, hurting the interest of the local producers Television market - Indian example experience of Philips during 1990s, present battle between Videocon (India), Sony (Japan), Samsung (South Korea) and LG (South Korea) etc. Any other example?

The Lesson So Far ..

Globalization is here to Stay No business is now purely internal barring few exceptions, and hence internationalization is an important strategy for firms given foreign competition Role of Economic Diversification and moving up the value chain is important Fiscal and Financial health of an economy plays a crucial role in determining its competitiveness, attractiveness and hence future growth path Country Strength and Business Negotiations with Partners Countries with limited set of options earn limited benefits