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What is global business? How does it differ from domestic business? 4, 4th>4
Business transactions (goods, services, factors of production) that are carried out across national borders
Differs in the additional things you must consider
•Countries have different business systems and different commercial environments
• Changes in currencies
•Need to work within the constraints imposed by the international trade and
investment system
•New or enhanced risks:
-Political (country) risk
-Currency (financial) risk - Exchange rate can change
-Commercial risk - Tax changes
-Cross cultural risk - People behave differently in different countries
Which are they key players in international business?
•Multinational enterprises (MNEs)
•Small and medium-sized enterprises (SMEs) - Only possible thanks to modern
technologies
•National governments - Can promote or hinder trade
•Non-governmental organisations (NGOs) - Oxfam imposing regulations against sweat shops
•Supranational organisations (WTO, World Bank etc)
List the terms in which countries differ and indicate why these must be considered? 7 RPELLNG
•Resources and institutions
•Political systems
•Economic systems
•Legal systems
•Levels of
economic development
•National culture
•Geography
These must be considered because they create opportunities and deficits.
How do countries differ in terms of Resources and institutions?
•Abundance or scarcity of resources - Determines what a country will be good at producing
•Institutions: Financial system, corporate governance system, infrastructure, education and training.
How do countries differ in terms of Political systems?
Two different bread systems
•Collectivist systems (socialism, communism, social democracy) stress the primacy of collective goals over individual goals.
•Individualist systems (representative democracy) stress that individual interests should take precedence over the interest of the State
- Tend to have pro-business and pro-free trade values
...
...
How do countries differ in terms of economic systems?
In the organisation and ownership of productive activities
•Pure market economy: all productive activities are privately-owned. Free market.
•Command economy: all productive activities are state-owned
•Mixed economy: most sectors are privately-owned, but some are state-owned. Free
market with some government intervention.
How do countries differ in terms of Legal systems? How might this concern global businesses?
Three main types of legal systems
•Common law: based on tradition
Judges have power to interpret the law
•Civil law: based on detailed set of laws organised into codes
Judges have power only to apply the law
•Theocratic law (retard law): based on religious
teachings
A well-functioning market economy requires laws protecting private property rights, and mechanisms for contract enforcement
How do countries differ in terms of levels of economic development?
Differences in incomes, consumption, savings, and investment.
How do countries differ in terms of national culture? Which are Hofstede's cultural dimensions? IPUMLI -> what implications do these create for firm strategies?
Different systems of values and norms.
• Values are abstract ideas about what a group believes to be right, good, and desirable
• Norms are social rules and guidelines that prescribe appropriate behaviour in particular situations
Hofstede's cultural dimensions
• Individualism vs collectivism
• Power distance: How unequal distribution of power is percipience (high=
acceptable)
•Uncertainty avoidance: High= low tolerance for ambiguity
•Masculinity vs Femininity
•Long term orientation (Future rewards, adapting to circumstances) vs. Short term (national pride; tradition)
•Indulgence restraint
Implications
Value systems and norms influence the costs of doing business, and the ability of firms to establish a competitive advantage in global markets - May influence choice of entry strategy.
How do countries differ in terms of geography ? How do these affect business opportunities and cost?
Climate
Coastal versus land-locked
Transport infrastructure
Geographic distances affect business opportunities and costs:
•Proximity to markets
•Proximity to suppliers
•Agglomerations of economic activity
Entry strategies - Exporting
Advantages
• Low risk
- You only have one manufacturing plant to worry about
• Cheaper
Disadvantages
• Home country may not be the lowest cost location
Entry strategies - Licensing
One entity granting the rights to intellectual property to another entity under specific conditions, and receives royalty in return
Advantages
•Licensor does not have to bear the development costs and risks associated with opening a
foreign market
•Avoids host country restrictions on FDI and risks of expropriation
Disadvantages
•Lack of control over licensee operations
•You are giving away your intellectual property to an independent company, which they can later use to create their own product and become a competitor
Entry strategies -Franchising
A contractual agreement between a franchisor and a franchisee that allows the franchisee to operate a retail outlet using a name and format developed and supported by the franchisor.
Advantages (similar to licensing)
1.Firm is relieved of costs and risks of opening foreign market
2.Incentive for franchisee to build profitable operation
3.Potential to build global presence quickly
Disadvantages
1.Impedes coordination of international operations
2.Election and training of franchisees may be a problem
3.Poor quality at franchise may damage
global reputation
Entry strategies -FDI
A parent firm from one country takes and entity stake in a subsidiary (affiliate) firm in another country
Advantages
1.Increased control
2.Protection of technology and IP
3.Direct feedback from market
Disadvantages:
1.Most expensive form of entry strategy
2.Riskiest form of entry strategy-> Expensive and no guarantee of success.
3.Host
country hostility-> People may not want the competition
Entry strategies - Strategic alliances
Cooperative non-equity agreements between potential or actual competitors
Advantages:
1.Facilitates entry into foreign market if in alliance with local competitor
2.Allow firms to share fixed costs and risks of developing new products, processes.
3.You grow as a joint company, becoming more of a
competitor in the global market
Disadvantages:
1.Partners gain access to technology and IP - > And then diss your sorry ass. bitch.
2.Difficulty to manage -> Perhaps the companies have divergent objectives
3.High failure rate - > Evident when looking at the history of joint ventures.
Why do countries trade with each other?
Trade has the potential to benefit all participating
countries for three main reasons:
1. Countries trade because they are different in terms of their factor endowments, and can benefit from these differences by specializing in the production of those goods/ services in which they have a comparative advantage
2. Counties trade because demand conditions differ between them
3. Countries trade to take advantage of economies of scale in production.
Doctrine of trade - Mercantilism 17th to 18th centuries.
Nations become powerful if they acquire large stocks of precious metals (gold and silver)
•Mercantilists favoured policies that:
-Promoted exports (and hence the inflow of precious metals)
-Hindered imports (and hence the outflow of precious metals) - Protectionism
Doctrine of trade - Specialisation as a basis for trade
Adam Smith (1778) emphasised the
importance of free trade in increasing the wealth of all trading nations
•Countries specialise by producing more than they need of certain goods/services, and exporting what is not consumed domestically
•the principle of absolute advantage -> If we are most efficient at producing a good we'll export it
The Ricardo model of trade
David Ricardo (1817) demonstrated that absolute advantage was not
necessary for mutually beneficial trade, only the weaker condition of comparative advantage
• The law of comparative advantage: Countries can gain from trade if they:
specialise in producing (and exporting) those goods in which they have a comparative advantage
import those goods in which they have a comparative disadvantage
The H-O model of trade
Countries differ in terms of their factor endowments
• Labour-abundant countries (china): Thus, will export labour intensive commodities (clothing, toys).
• Capital-abundant countries (Japan, USA, Europe): Will export Capital intensive commodities (manufacturers
• Land-abundant countries (Canada, Australia): will export land-intensive commodities (livestock, agriculture)
Comparative advantage (CA) is influenced by the interaction between:
•the resources of countries (their relative factor abundance), and
•the technology of
production (the relative factor intensity of different goods/services)
Demand conditions as a basis for trade. Give example. What does this kind of trade lead to?
Differences in consumer tastes create basis for mutually advantageous trade, even if no differences in production possibilities
• Consider a world with two countries (Britain and Italy):
-Each country produces two products (pasta and
potatoes)
-Each country has identical production possibilities frontiers
-British consumers prefer potatoes, whilst Italian consumers prefer pasta
• If there is no trade:
-Potatoes will be more expensive in Britain
-Pasta will be more expensive in Italy
• If there is trade:
-Britain will export pasta to, and import potatoes from, Italy
-Italy will export potatoes to, and import pasta from, Britain -Trade equalises the prices of both pasta and potatoes in both
countries
Trade leads to more specialisation in consumption, but less specialisation in production
Define economies of scale - Illustrate the factors that result in an increase in scale
Factors that cause a producer's average cost per unit to fall as output rises
•Labour specialization
•Specialized equipment
•Bulk buying of inputs
•Profitable use of by-products
•Enhanced development of
support facilities
Economies of Scale as Basis for Trade. Define economies of scale
The H-O models are built on the assumption of constant returns to scale
but many industries are characterised by increasing returns to scale.
•The gains from trade arise from the economies of scale of producing only one type of car in each country (labour specialization) both countries are now able to consume more red and
blue cars than if they did not trade with each other.
What determines the direction of specialization?
-Historical accident
-Strategic trade policy (Lecture 4)
• Industries which are subject to increasing returns to scale are characterized by intra-industry trade in differentiated products:
-Greater specialization keeps costs low
-But consumers want variety
-Two-way trade in similar
products
What kind of trade will dominate if:
•Two countries have similar capital-labour ratios?
•Two countries have dissimilar capital-labour ratios?
• Two countries have similar capital-labour ratios then intra-industry trade will dominate (trade of goods within the same industry)
- Why would you buy toys from another country if your country produces them equally well?
•Two countries have
dissimilar capital-labour ratios, then inter-industry trade will dominate
- You would buy cars from a country that has a better car industry (capital ratio)
Which are the benefits and costs of internationalization?
Benefits
•Access to wider markets for products, which may be cheaper
•Lower costs through economies of scale
•Realise cost economies by locating value chain activities where they can
be effected more cheaply - e.g. sweat shops in Indonesia :D
Costs
•Expansion adds complexity to management, and increases coordination costs. See distance. One is not used to new countries
•Enhanced exposure to systematic risk (Political, currency, cross-cultural)
The Uppsala model - What does it attempt to explain? Which are its variables/mechanisms?
Explains how firms gradually intensify their
international involvement in a commutative way
•Dynamic: The outcome of one decision constitutes the input of the next
•Emphasize that the business environment comprises a network of relationships which offer potential for learning and for building trust and commitment.
State variables:
•Degree of commitment to foreign markets (resources investments)
•Knowledge about foreign markets:
1. Objective knowledge - Easily taught
2. Experiential knowledge - learned through
experience within the foreign environment.
Change mechanism: Which cumulatively increase the resource commitment into the foreign markets. Going from licensing to wholly owned subsidiaries.
•Accumulation of knowledge by doing business in overseas markets
•Organizational learning: Of foreign markets, reducing perceived risk and uncertainty.
Criticisms of Uppsala models
•Does not consider
differences between markets
•Only considers marketing, not production
•Very deterministic-> suggests all firms follow similar patterns of development
What's the difference between FPI and FDI?
FPI underlies foreign stocks, bonds. -> DOES NOT GIVE MANAGEMENT
FDI underlies investments taken by MNEs with the intention of participating in the, usually long term, management of the target firm. Equity investement.
List the theories of FDI and why MNEs exists
1. Neoclassical theory of international investment
2. Market power theory
Neoclassical theory of international investement
•Capital moved across national borders in response to interest rate differentials:
Supply and demand
•Does not explain explanation of key facts about FDI and MNEs
Market power theory
Firms engage in FDI to establish dominant market position as it leads to increased profits.
Control is motivation for FDI over FPI
•FDI takes place, and MNEs exist because firms have firm-specific advantages which they can exploit by FDI in foreign markets, and thus enhance their market power
the Product life theory
Integrated theory of both trade and FDI - The role of innovation in determining trade patterns.
Products have three stages of maturation
1. New: Lots of marketing, sales low, competition low. Lots of risk
2. Maturity: Product widely accepted. Growth slows. Competitors emerge putting downwards pressure on prices, causing producers to spend in order to defend market position or expand via FDI
3. Standardization/decline
The product is
completely standardised, and competition intensifies
•Production moved to even lower-cost developing countries
•Re-imports back to US and other advanced countries
•Profitability low for innovating firm
Internalization theory
The concept that to obtain a higher return on its investment, a firm will transfer its SUPERIOR KNOWLEDGE to a foreign subsidiary rather than sell it in the open market.
•Most
production involves a range of activities, connected by flows of intermediate goods and services
•Various problems involved in coordinating these activities through arm's length contractual arrangements, particularly across national borders:
•There is thus an incentive to bring these activities under common ownership (internalise) within the MNE
Criticisms: Explains why MNEs exist but not why they grow
Evolutionary theory of MNE
Founded on resource-based view of the firm:
•MNEs are repositories of 'TACTIC' knowledge, EMBEDDED IN THE EMPLOYEES AND FIRM ROUTINES
•Boundaries of the firm are set by the perceived dynamic benefits of exploiting firm-specific knowledge internally
•MNE is an efficient means for the exploitation of this tactic knowledge across national borders
Eclectic (OLI) framework
Analysis
presented in terms of interplay of ownership, location, and internalisation advantages:
•Ownership (O) advantages firm-specific, and form the basis of a firm's competitive advantage over its rivals
-Superior knowledge
•Location (L) advantages are specific to a country, and which are make it attractive as a production location
- Quality and price
Internalisation (I) advantages are the benefits that are derived from producing internally within firms (MNE), rather than through the
market -> less uncertainty, more control
FDI entry mode choice- Which are the 2 sets of options when making a FDI
•Wholly-owned Subsidiary V.S. International joint venture
•Greenfield Venture V.S Acquisition
Wholly-owned Subsidiary + Advantages and dissadvantages
100% equity ownership
Advantages
•Full operational
control: Useful for the pursuit of global strategic objectives
•Reduced Risk of intellectual property leakage
Disadvantages
• Most expensive mode of market entry in terms of capital investment
•Risk associated with doing business in foreign country may be substantial
International Joint venture + Advantages and dissadvantages
Jointly owned firm
Advantages:
•Shared resource commitment and
risks of establishing new venture
•Access to complementary assets and resources: Technical know-how, knowledge and marketing expertise within the environment
Disadvantages:
•Potential leakage of intellectual property (IP)
•Conflicts of strategic objectives with partners: Due to different management style? one needs the other more?
•Trust between partners is a key issue, but the nature and meaning of trust varies between cultures
Greenfield venture + Advantages and dissadvantages
Establish a new venture from scratch: Either WOS or IJV
Advantages:
•You can assemble the venture however you want in terms of
-Suppliers
-Partners (if IJV)
-Location
-Size
•Easier to build the organisational culture, and to establish operating routines
Disadvantages:
•Slow to establish
Risky and uncertain revenues and profits
•Possible conflicts with local competitors
Acquisition +Advantages and Disadvantages
Buying all (WOS) or some of the equity (IJV) in an established venture in the target market
Advantages:
•Acquisition of valuable intangible assets
•Speed of execution relative to WOS
•Competitors have less time to react to you arrival
•Less uncertainty
Disadvantages
•Often disappointing outcomes
•Acquiring firm often overpays for the target
firm:
-Management too optimistic about potential synergies
• Often one must purchase assets that they don't want.
Partner selection
•Two way process, you each need to be satisfied with each other
Information to consider:
•Physical assets
•Intangible assets (Brands, contacts, quality of customer relations)
Need to agree on scope of partnership.
Distance
Denotes the dimension in which differences manifest between countries
Geographic distance
•Physical distance
•Increased potential for information asymetry
•One knows less about the market conditions, regulations, social dynamics, culture etc. of countries that are further away.
Cultural Distance
Differences
in:
•Social norms/values
•unfamiliarity of cultural environment
Administrative distance
Political differences
-Policies
-Domestic prohibitions
-Enviromental policies
-Tarriffs
Historical ties
-Formal or informal
- Define the structure of interactions and economic exchanges between countries.
Economic distance
Differences in:
• consumer incomes
•Price and quality of resources
•Demand
•Cost of labour
Psychic distance
Sum of factors preventing the flow of information
•Language
•Education
•Time zones
•Culture