Global Business Environment: Going Global to Stay Local?

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Global Business EnvironmentGoing Global to Stay
Local?

• Lecture 1

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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?
• The Political Economy whats a perfect recipe
  for success?
• Soft factors role of Culture etc.
• Operational issues Trade Finance, Global
  Sourcing
• Control factor in international business

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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 Web-resources
• Recent happenings on international business issues

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Evaluation Pattern and Schedule
Component Weight
Class Participation 10
Quiz (Best Two out of three) 20
Group Project Report Presentation 30
End Term Examination 40
Session No Quizzes and Project Report
4 Quiz No 1
7 Quiz No. 2
10 Quiz No. 3
End Term Examination Submission of Group Project Report
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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 adds significant
  influences to typical domestic operations
• Physical
• Societal
• Competitive
• 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?
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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?

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What defines Globalization?

• 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
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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
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The fragmentation of production The example of
the Boeing 787 Dreamliner
Source WTO (2011)
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Complementary parts supply system of an
automobile assembler in ASEAN
Source Hiratsuka (2010)
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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??
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Global Canvas GDP Growth
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?

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Growth in Global Export (Merchandise)
How has Indias merchandise export suffered, due
to imbalances in Global Market?
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Growth in Global Export (Service)
How has Indias service export suffered, due to
imbalances in Global Market?
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Who are the prominent exporters? Global
Merchandise Export Market Share ()
Is business / trade mainly created by Price
difference??
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Who are the prominent exporters? Global Service
Export Market Share ()
Is GDP growth affected by external factors, e.g.,
oil supply?
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Recession and Global FDI (US Bn.)
WIR (2012)
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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
• Metals
• Agriculture raw materials (cotton and rubber)
• Edible oils
• Coconut and palmkernel oil
• Cocoa

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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) LG (South Korea) etc.
• Any other example?

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The Lesson So Far ..

• No business is now purely internal barring few
  exceptions, and hence internationalization is an
  important strategy for firms given foreign
  competition
• Globalization is here to Stay
• Countries with limited set of options earn
  limited benefits
• 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
• Role of Economic Diversification and moving up
  the value chain is important

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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

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Stronger legal institutions and property rights
protections are associated with more efficient
regulatory processes(Average ranking on sets of
Doing Business indicators)
DBR (2012)
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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

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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
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Technological progress has reduced the quantity
of commodities used per unit of GDP
Reduction in transportation cost and
accessibility of modern communication technology
has a positive impact on trade and growth.
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20th Century Revolution
Source Hummels
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Operations and Influences
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Why Engage in International Business?

• Expand sales
• Volkswagen (Germany) Ericsson (Sweden) IBM (US)
• Acquire resources
• 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)
• Minimize risk
• 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.
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A Globalized Venture Harry Potter
Category Person - Country of Origin
Author J. K. Rowling (British)
Producer David Jonathan Heyman (British)
Distributor Warner Brothers (US)
Director Christopher Joseph Columbus (US) Alfonso Cuarón Orozco (Mexico)
Screenplay Stephen Keith Kloves (US) Michael Goldenberg (US)
Editing Richard Francis-Bruce (Australia)
Music Patrick Doyle (Scotland)
Visual Effects Rising Sun Pictures (Australia) Double Negative (UK) Cinesite (UK) Industrial Light Magic (US)
Actors From more than 20 countries
Location UK, Scotland
Question 1 Why simultaneous multiple release of the Movie?
Question 2 Why the recent movies were released in 3D?
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And how the countries Gain?

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

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Modes of International Business

• Importing (Reliance
  Industries Limited importing crude oil) and
  exporting (Tata Motors exports 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.)
• 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)

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International Strategy Lifecycle
Selling Products or Services Outside a Firms
Domestic Market
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The Location choice of MNCs?

• 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.
• Can cheap labour come to domestic country and
  ensure production?
• Example Bangladesh Garments Industry - local
  labour Korean FDI

Is FDI all about manufacturing and services?
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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
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Sequential flying geese paradigm
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Sequential flying geese paradigm ..
Indias advantage?
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How Did Japanese FDI Travel?

1. Phase 1 1970s -

1. Phase 2 1980s -

1. Phase 3 1990s -

FDI - Production

1. Phase 2 2000s -

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Agri FDI Recent Trends

• Nestlé (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.
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Policy Issue for a country Export Promotion or
Import Substitution?
X or M?
www.abanet.org
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Empirical Evidence Reasons behind Trade and
Development Policy Reforms

• 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)
• Late entry and industrial structure
• Infant Industry and Optimum Tariff Argument

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Other factors for Growth?

• 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 José Ramón 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
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Levels / Terms of International Companies -
Strategies

• 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)
• 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

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International Corporate Strategy
When is each strategy appropriate?
Multi- Domestic
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International Corporate Strategy
When is each strategy appropriate?
Global Strategy
Multi- Domestic
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International Corporate Strategy
When is each strategy appropriate?
Trans- national
Global Strategy
Multi- Domestic
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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).

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Pattern of Internationalization
Greater reach abroad is also characterized by
greater demand for quality service, if needed, by
global players
48
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
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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

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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
• Countries reluctantly cede some sovereignty /
  facility because of
• 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)

The US Primary Dealers Act (1988) provides for
National Treatment of foreign-owned dealers of
U.S. government securities, as long as U.S. firms
operating in the government debt markets of the
foreign country are accorded "the same
competitive opportunities" as domestic companies
operating in those markets.
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Suez Canal Crisis

• 1869 Suez Canal, an artificial sea-level
  waterway opened, work financed by the French and
  Egyptian governments - operated by the Universal
  Company of the Suez Maritime Canal, an
  Egyptian-chartered company the area surrounding
  the canal remained sovereign Egyptian territory
• Growth in trade between Asia and Europe
• 1875 facing debt and financial crisis, the Egypt
  sold its shares in the canal operating company to
  British government
• 1882 Britain controlled Egypt, built army bases
• 1936 British lease of Suez canal extended for 20
  years
• 1950s Suez became a gateway for oil trade to
  Europe and America
• 1953 Establishment of Egyptian Republic
• 1956 Nationalization of the Suez Canal by Egypt,
  to be managed by Suez Canal Authority (SCA)
• War with Israel, defeat, introduction of UN
  Peacekeeping Mission
• 1967-75 Arab-Israel war, difference sorted after
  that

• Results
• Gradual weakening of UK and France as major
  powers
• Lead to Pan-Arabism, crucial step in OPEC
  decision to increase oil price during 1970s
• Political Scenario in Egypt and Arab Spring