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BUS 231 - International Business

Week 3 Mohibul Islam Masum

Todays Agenda

Attendance & the profile Text Books and an introduction to the course What is International Business (IB)? Globalization and its impact on IB. Case study: McDonalds in China Tasks for the next class

Formal education will make you a living; self-education will make you a fortune. Jim Rohn
Jim Rohn (September 17, 1930 - December 5, 2009) was an American entrepreneur, author and motivational speaker. Jim authored countless books and audio and video programs, and helped motivate and shape an entire generation of personal-development trainers and hundreds of executives from America's top corporations. Jim shared his message with more than 6,000 audiences and over 5 million people all over the world.

Introduction

This subject provides an introduction to business in an international context. Business is becoming increasingly global and firms require managers who understand and can resolve the challenges faced in surviving and succeeding in this competitive environment. Greater internationalization of business requires firms to be more competitive, dynamic, and interdependent. Managers must understand the complexities of global economic, political, socio-cultural, and financial forces and recognize how they affect their firm.
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Management challenges include dealing with the uncertain external environment, managing cultural diversity, handling the increased risk of international operations, and developing appropriate international strategies.

Managers capable of operating in this environment will have truly global skills and will enhance their career prospects in todays exciting international business context.

What is international business?

International business involves any business transaction between parties from more than one country.
International business is different from domestic business in that it necessarily involves transactions that cross national borders while domestic business does not.

What is international business?

1. 2. 3. 4.

Is international business more complex than domestic business?

Competition Distribution Economic Socio-economic Financial Legal Physical Political Socio-cultural Labor Technological
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5.
6. 7. 8. 9. 10. 11.

What is Globalization?

Globalization refers to the shift toward a more integrated and interdependent world economy. It has several facets, including : the globalization of markets the globalization of production

The Globalization of Markets

Refers to the merging of historically distinct and separate national markets into one huge global marketplace. Declining trade barriers Global taste and preferences of consumers creating a global market However, significant differences still exist among national markets

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The Globalization of Production

Refers to the 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, capital). Boeing 777 8 Japanese suppliers make parts for the fuselage (body), doors and wings; a supplier in Singapore makes the doors for the nose landing gear; 3 suppliers in Italy manufacture wing flaps. 30% is built by foreign companies. For 787, 65% is built by foreign companies.

Emergence of Global Institutions!

As markets globalize and an increasing proportion of business activity transcends national borders, institutions are needed to help manage, regulate, and police the global marketplace and to promote the establishment of multinational treaties to govern the global business system. GATT: General Agreement on Tariffs and Trade. WTO: World Trade Organization. IMF: International Monetary Fund The World Bank, UN: United Nations.

GATT: General Agreement on Tariffs and Trade GATT was signed in 1947 and lasted until 1993, when it was replaced by the World Trade Organization (WTO) in 1995. The original GATT (GATT 1947) is still in effect under the WTO framework.

WTO: World Trade Organization

Responsible for policing the world trading system.

Facilitating the establishment of additional multinational agreements between WTO member states. Promoted lowering barriers to cross-border trade and investment. As of 2007, 150 nations that collectively accounted for 97% of world trade were WTO members.

IMF: International Monetary Fund and World Bank

Both were created in 1944 by 44 nations. IMF maintain order in the international monetary system. Loans granted with requirements to adopt specific economic policies aimed at returning troubled economies to stability and growth (controversial?!). WB promote economic development by granting lowinterest loans to cash-strapped governments in poor nations.

UN: United Nations

Established on Oct 24, 1945 by 51 countries; today, there are 192 members. Four purposes of the UN: To maintain international peace and security, To develop friendly nations among nations, To cooperate in solving international problems and in promoting respect for human rights, To be a center for harmonizing the actions of nations. Also promotes higher standard of living, full employment, economic and social progress.

Drivers of Globalization
Declining trade and investment barriers International trade: occurs when a firm exports goods or services to consumers in another country. Foreign Direct Investment (FDI): occurs when a firm invests resources in business activities outside its home country.

Countries erected formidable barriers to international trade and FDI through high tariffs on imports of manufactured goods in order to protect domestic industries from foreign competition. Countries raised trade barriers against each other and ultimately this depressed world demand and contributed to the Great Depression of the 1930s. After WW2, nations committed to remove the barriers. Average tariff rates have fallen significantly since 1950 and now stand at about 4% (manufactured goods). Average agricultural tariffs rates are still high 40%.

Countries have also been removing restrictions to FDI. 94% of the 2,266 changes made worldwide between 1992 and 2005 in the laws governing FDI created a more favorable environment for FDI. There has been a dramatic increase in the number of bilateral investment treaties designed to protect and promote investment between two countries. As of 2005, 2,495 treaties involved more than 160 countries, 12-fold increase from the 181 treaties in 1980.

Such trends have been driving both the globalization of markets and the globalization of production.

Firms can now view the world as one large market. Base production at the best location (resources). Design in one country, produce parts in a few countries, assemble in another country and then market or export the finished product around the world. Firms are able to reduce production costs and increase product quality. Economies are becoming intertwined, countries are becoming dependant on each other for goods and services.

Firms are also finding their home markets under attack from foreign competitors. In Japan Kodak, Proctor & Gamble. In USA Japanese cars have taken market share away from General Motors and Ford. In Europe Philips now shares the market of consumer electronics industry with JVC, Matsushita, Sony, Samsung, LG. Intensity of competition is increasing. Therefore, demands for protection from foreign competitors are still often heard in countries around the world.

The Role of Technological Change Microprocessors and Telecommunications

Important innovation Microprocessor. Enabled the growth of high-power, low-cost computing. Also underlies many recent advances in Telecom. Technology . Developments in satellite, optical fiber, wireless technologies, internet and WWW revolutionized global communications.

The Internet and World Wide Web 1990 less than 1 M users. 1995 50 M. 2006 747 M.

In the US $ 250 B of goods and services are expected to be sold online to retail customers 2007, up from almost nothing in 1997.

The Web makes is easier for buyers and sellers to find each other; it allows businesses, both small and large, to expand their global presence at a lower cost than ever.

Transportation Technology Development of commercial jet aircraft, containerization, super freighters

has revolutionized the transportation industry significantly lowering the costs of shipping goods over long distances and made it easier to move goods from one mode of transportation to another.

Implications for the Globalization of Production

Firms can create and manage globally dispersed production system. Dell holds only 3 days worth of inventory at its assembly locations.

Its internet based system records orders, then immediately transmits orders for components to various suppliers worldwide, who can have a real-time look at Dells order flow and can adjust their production schedules accordingly. Air transportation to speed up delivery, modern communication technology to outsource customer service operations to India.

Implications for the Globalization of Markets Low-cost transportation has made shipping products around the world more economical, thereby helping to create global markets. Roses grown in Ecuador can be sold in New York 2 days later while they are still fresh. This has given rise to an industry in Ecuador that did not exist 20 years ago and that now supplies a global market for roses.

Low cost travel has resulted in the mass movement of people between countries, reducing cultural distance and bringing convergence of consumer tastes and preferences. Global media creating a global culture emergence of global markets for consumer products. But still significant national differences remain in culture, consumer preferences and business practices.

When internationalizing, firms must be aware of such cultural differences

Management challenges!

Is it any different being a manager in a domestic environment compared with an international environment? Countries are different Management problems are more complex Different rules of the game (limits imposed by government intervention in the international trade and investment system). Different money transactions
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Culture: system of values and norms that are shared among a group of people.

Values: Abstract ideas about what a group believes to be good, right and desirable; form bedrock of a culture. Freedom, democracy, justice, love, religion.

Norms: The social rules and guidelines that prescribe appropriate behavior in a particular situation. Dress code, correct utensils, neighborly behavior, time.

One big challenge for IB Managers

The Case of McDonalds in China

Guanxiwang Opened in 1992 in Beijing after a decade of market research. Largest, 2 blocks from Tiananmen Square.

The Tiananmen Square protests of 1989, referred to in much of the world as the Tiananmen Square massacre and in Chinese as the June Fourth Incident or "June Fourth Movement or "Six Four Incident. There were a series of demonstrations in and near Tiananmen Square in Beijing beginning on 14 April 1989; led mainly by students and intellectuals; against the government's authoritarianism and voiced calls for economic change and democratic reform within the structure of the government. The protests were sparked by the death of Hu Yaobang, a political leader (6th General Secretary of the CPC).

By the eve of Hu's funeral, 100,000 people had gathered at Tiananmen Square.
The movement lasted seven weeks after Hu's death on 15 April. In early June, the People's Liberation Army moved into the streets of Beijing with troops and tanks and cleared the square with live fire. Some of the early estimates were based on reports of a figure of 2,600 from the Chinese Red Cross. The official Chinese government figure is 241 dead, including soldiers, and 7,000 wounded.

High sales within 2 years. Beijing City Govt. vacate for Hong Kong developer Li Ka- shing. McDonalds still had 18 years left. In the court refusal, had to move. Lacked the guanxi of Li Ka- shing. The lawsuit reduced whatever guanxi Mc had with Govt. The key to getting things done personal powers, relationships, connections rather than the rule of law. Guanxi means relationships ; in business context connections. Guanxiwang means relationship network.

The concept is deeply rooted in Chinese culture, the Confucian philosophy of valuing social hierarchy and reciprocal obligations (2000 years old). Importance of relationships. Confucian thought people are not created equal. Loyalty and obligations to ones superiors (or to family) is sacred duty, at the same time loyalty has its price. Guanxiwang for business.

References:

International Business Competing in the Global Marketplace by Charles W. Hill. Internet.

Grazie! Any Questions?