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International Business Strategy, Management & the New Realities


Week 2 International Business Management: Globalization and Theories of International Business Sakda Siriphattrasophon, Ph.D. 06 June 2009 Globalization Trend toward ... – PowerPoint PPT presentation

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Title: International Business Strategy, Management & the New Realities

Week 2
International Business Management Globalization
and Theories of International Business
Sakda Siriphattrasophon, Ph.D.
06 June 2009
Learning Objectives
  • Describe globalization
  • Explain how globalization affects markets and
  • Explain types of participant in IB and how they
    organized by value-chain activity
  • Theories of international trade and investment
  • How nations enhance their competitive advantage
    contemporary theories

  • Trend toward greater economic, cultural,
    political and technological interdependence among
    national institutions and economies

Globalization of Markets A Macro Concept
  • Market globalization is a broad term referring to
    the interconnectedness of national economies and
    the growing interdependence of buyers, producers,
    suppliers, and governments in different
  • Globalization allows firms to view the world as
    one large marketplace for goods, services,
    capital, labor, and knowledge.

Types of Globalization
  • Globalization of markets
  • Convergence in buyer preferences in markets
    around the world
  • Globalization of production
  • Dispersal of production activities worldwide to
    minimize costs or maximize quality

Benefits of Globalization
  • Globalization of markets
  • Reduces marketing costs
  • New market opportunities
  • Levels income stream
  • Globalization of production
  • Access low-cost labor
  • Access technical expertise
  • Access production inputs

The Drivers and Consequences of Market
A Framework of Market Globalization
  • Market globalization can be conceived in terms
  • the drivers or causes of globalization
  • the many dimensions or manifestations of
  • societal consequences of globalization and
  • firm-level consequences of globalization which
    compel firms to proactively internationalize.
  • There is an interactive relationship between
    market globalization and its consequences.

Dimensions of Market Globalization
  • Greater integration and interdependency of
    national economies leading to freer movement of
    goods, services, capital, and knowledge
  • Rise of regional economic integration blocs
  • Growth of global investment and financial flows
  • Convergence of consumer lifestyles and
  • Globalization of production

Drivers of Market Globalization
  • Worldwide reduction of barriers to trade and
  • Market liberalization and adoption of free
  • Industrialization, economic development, and
  • Integration of world financial markets
  • Advances in technology

Globalization Drivers I
  • Remove barriers to trade / investment
  • GATT
  • WTO
  • Regional trade agreements
  • Market liberalization and adoption of free
  • Industrialization, economic development, and
  • Integration of world financial markets
  • Advances in technology

Globalization Drivers II Technological Innovation
  • E-mail and videoconferencing
  • Better coordination and control
  • Internet, intranets, and extranets
  • Improved communications and management
  • Transportation advancements
  • More efficient, dependable shipping

Declining Cost of Global Communication and
Growing Number of Internet Users
Societal Consequences of Market Globalization
  • Positive consequences Cross-border trade and
    investment opened the world to innovations and
    progress while increasing performance standards,
    currently known as global benchmarking or world
  • Negative consequences The transition to an
    increasingly single, global marketplace poses
    challenges to individuals, organizations and

Unintended Consequences of Market Globalization
  • Loss of national sovereignty
  • Power shifts to MNEs and supranational
    organizations concentration of power by MNEs
    leads to monopoly
  • Offshoring and the flight of jobs
  • Globalization causes dislocation of jobs firms
    shift manufacturing abroad in order to avoid
    workplace safety and health regulations
  • Effect on the poor
  • Benefits of globalization are not evenly
  • Effect on the natural environment
  • MNEs fail to protect the environment
  • Effect on national culture
  • Globalization results in loss of national
    cultural values and identity

Relationship Between Globalization and Growth in
Per Capita Gross Domestic Product, 1990s
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Firm Level Consequences of Market Globalization
  • Countless new business opportunities for
    internationalizing firms
  • New risks and intense rivalry from foreign
  • More demanding buyers who source from suppliers
  • Greater emphasis on proactive internationalization
  • Internationalization of firms value chain

Examples of How Firms Value Chain Activities Can
Be Internationalized
Internationalization of the Firms Value Chain
  • Value Chain the sequence of value adding
    activities performed by the firm in the process
    of developing, producing, marketing, and
    servicing a product.
  • Market globalization compels firms to reconfigure
    their sourcing, manufacturing, marketing, and
    other value-adding activities on a global scale.
  • Reasons for reconfiguring value adding activities
    include potential cost savings the need to
    access customers, inputs, labor, or technology
    and the opportunity to exploit foreign partner

Three Types of Participants in IB
  • The focal firm initiator of IB transaction,
    including MNEs and SMEs
  • Distribution channel intermediary specialist
    firm providing logistics and marketing services
    in the international supply chain
  • Facilitator a firm providing special expertise
    in legal advice, banking, customs clearance,
    market research, and similar areas

Participants Organized by the Value Chain
  • The focal firms, intermediaries, and facilitators
    all are involved in one or more critical
    value-adding activities such as procurement,
    manufacturing, marketing, transportation,
    distribution, and support -- configured across
    several countries.
  • The value chain can be thought of as the complete
    business system of the focal firm. It comprises
    all of the activities that the focal firm
  • The focal firm may retain core activities such as
    production and marketing, and outsource
    distribution and customer service
    responsibilities to foreign-market based
    distributors, thus the global reconfiguration of
    the value chain.

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Global Value Chain in the Automotive Industry
  • Manufacturing of the Chevrolet Malibu illustrates
    national and geographic diversity of suppliers
    that provide content for an automobile, a truly
    global value chain.
  • Suppliers are headquartered in Germany, Japan,
    France, Korea, and United Kingdom, and the U.S.,
    and the components they sell to General Motors
    are manufactured in typically low-cost countries
    and then shipped to the General Motors plant in
    Fairfax, Kansas.

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Global Value Chain for Dell Computers
  • Dell makes a variety of products, each with its
    own value chain. The total supply chain for a
    notebook computer, including multiple tiers of
    suppliers, involves about 400 companies,
    primarily in Asia, but also in Europe and the
  • On a typical day, Dell processes orders for
    150,000 computers, which are distributed to
    customers around the world, with non-U.S. sales
    accounting for 40 percent.
  • Shipping is handled via air transport, e.g. from
    the Dell Malaysia factory to the U.S. Dell
    charters a China Airlines 747 that flies to
    Nashville, Tennessee six days a week, with each
    jet carries 25,000 Dell notebooks that weigh a
    total of 110,000 kilograms, or 242,500 pounds.
  • One of the hallmarks of Dells value chain is
    collaboration. CEO Michael Dell and his team
    constantly work with their suppliers to make
    process improvements in Dells value chain.

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International BusinessStrategy, Management the
New Realitiesby Cavusgil, Knight and
  • Theories of International Trade and Investment

Foundation Concepts
  • Comparative advantage
  • Superior features of a country that provide it
    with unique benefits in global competition
    derived from either national endowments or
    deliberate national policies
  • Competitive advantage
  • Distinctive assets or competencies of a firm
    derived from cost, size, or innovation strengths
    that are difficult for competitors to replicate
    or imitate

Perspectives of the Nation and the Firm
  • Comparative advantage
  • Is the concept that helps answer the question of
    all nations can gain and sustain national
    economic superiority
  • Competitive advantage
  • Is the concept that helps explain how individual
    firms can gain and sustain distinctive competence
    vis-à-vis competitors

Examples of National Comparative Advantage
  • China is a low labor cost production base
  • Indias Bangalore region offers a critical mass
    of IT workers
  • Irelands repositioning enabled a sophisticated
    service economy
  • Dubai, a previously obscure Emirate, has been
    transformed into a knowledge-based economy

Examples of Firm Competitive Advantage
  • Dells prowess in global supply chain management
  • Nokias design and technology leadership in
  • Samsungs leadership in flat-panel TV
  • Herman Millers design leadership
  • in office furniture
  • (e.g., Aeron chairs)

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Why Nations Trade Classical Theories
  • Mercantilism the belief that national prosperity
    is the result of a positive balance of trade
    maximize exports and minimize imports
  • Absolute advantage principle a country should
    produce only those products in which it has
    absolute advantage or can produce using fewer
    resources than another country

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Why Nations Trade Classical Theories
  • Comparative advantage principle it is beneficial
    for two countries to trade even if one has
    absolute advantage in the production of all
    products what matters is not the absolute cost
    of production but the relative efficiency with
    which it can produce the product
  • By specializing in what they produce best and
    trade for the rest, countries can use scarce
    resources more efficiently

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Limitations of Early Trade Theories
  • Do not take into account the cost of
    international transportation
  • Tariffs and import restrictions can distort trade
  • Scale economies can bring about additional
  • When governments selectively target certain
    industries for strategic investment, this may
    cause trade patterns contrary to theoretical
  • Today, countries can access needed low-cost
    capital on global markets
  • Some services do not lend themselves to
    cross-border trade

Classical Theories Factor Proportions Theory
  • Factor proportions (endowments) theory each
    country should produce and export products that
    intensively use relatively abundant factors of
    production, and import goods that intensively use
    relatively scarce factors of production
  • Leontief paradox suggested that countries can be
    successful in the export of products that require
    a less abundant resource (e.g., the U.S. with its
    labor-intensive exports)
  • The Leontief paradox implies that international
    trade is complex and cannot be fully explained by
    a single theory, e.g., the abundance of a certain
    production input

Classical Theories International Product Cycle
  • International product cycle theory each product
    and its associated manufacturing technologies go
    through three stages of evolution introduction,
    growth, and maturity
  • In the introduction stage, the inventor country
    enjoys a monopoly both in manufacturing and
  • As the products manufacturing becomes more
    standard, other countries will enter the global
  • When the product reaches maturity, the original
    innovator country will become a net importer of
    the product
  • Applicability to the contemporary global economy
    Today, the cycle from innovation to maturity is
    much shorter making it harder for the innovator
    country to sustain its lead in a particular

How Nations Enhance Competitive Advantage
  • The contemporary view suggests that governments
    can proactively implement policies to enhance a
    nations competitive advantage, beyond the
    natural endowments the country possesses
  • Governments can create national economic
    advantage by stimulating innovation, targeting
    industries for development, providing low-cost
    capital, and through other incentives

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Michael Porters Diamond ModelSources of
National Competitive Advantage
  • Firm strategy, structure, and rivalry the
    presence of strong competitors at home serves as
    a national competitive advantage
  • Factor conditions labor, natural resources,
    capital, technology, entrepreneurship, and know
  • Demand conditions at home the strengths and
    sophistication of customer demand
  • Related and supporting industries availability
    of clusters of suppliers and complementary firms
    with distinctive competences

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Industrial Clusters
  • A concentration of suppliers and supporting firms
    from the same industry located within the same
    geographic area
  • Examples include the Silicon Valley, fashion
    cluster in northern Italy, pharma cluster in
    Switzerland, footwear industry in Pusan, South
    Korea, and the IT industry in Bangalore, India
  • Industrial clusters can serve as an export
    platform for individual nations

National Industrial Policy
  • Proactive economic development plan implemented
    by the public sector to nurture or support
    promising industry sectors with potential for
    regional or global dominance. Public sector
    initiatives can include
  • Tax incentives
  • Monetary and fiscal policies
  • Rigorous educational systems
  • Investment in national infrastructure
  • Strong legal and regulatory systems

New Trade Theory
  • The argument that economies of scale are an
    important factor in some industries for superior
    international performance even without any
    clear comparative advantage possessed by the
    nation. Some industries succeed best as their
    volume of production increases.
  • For example, the commercial aircraft industry has
    very high fixed costs that necessitate
    high-volume sales to achieve profitability.

Why and How Firms Internationalize
  • The internationalization process model of the
    firm suggests a gradual, evolutionary path to
  • The slow and incremental nature of
    internationalization by the firm results from the
    uncertainty and uneasiness that managers have
    about cross-border transactions
  • A predictable pattern of internationalization may
    include the following stages domestic focus,
    pre-export stage, experimental involvement,
    active involvement, and committed involvement

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How Firms can Gain and Sustain International
Competitive Advantage
  • Since the MNE has traditionally been the major
    player in international business, many scholars
    have offered explanations of what makes these
    firms pursue, and succeed in, internationalization
  • FDI has been the principal strategy used by MNEs
    in international expansion therefore, earlier
    theoretical explanations relate to motives for,
    and patterns of, foreign direct investment

FDI Based Explanations Monopolistic Advantage
  • Suggests that FDI is preferred by MNEs because it
    provides the firm with control over resources and
    capabilities in the foreign market, and a degree
    of monopoly power relative to foreign competitors
  • Key sources of monopolistic advantage include
    proprietary knowledge, patents, unique know-how
    and skills, and sole ownership of other assets

FDI Based Explanations Internalization Theory
  • Explains the process by which firms acquire and
    retain one or more value-chain activities inside
    the firm retaining control over foreign
    operations and avoiding the disadvantages of
    dealing with external partners
  • In contrast to arms-length foreign market entry
    strategies (such as exporting and licensing)
    which imply developing contractual relationships
    with external business partners, FDI implies
    control and ownership of resources

FDI Based Explanations Dunnings Eclectic
  • Three conditions determine whether or not a
    company will internalize via FDI
  • Ownership-specific advantages knowledge,
    skills, capabilities, relationships, or physical
    assets that form the basis for the firms
    competitive advantage
  • Location-specific advantages advantages
    associated with the country in which the MNE is
    invested, including natural resources, skilled or
    low cost labor, and inexpensive capital
  • Internalization advantages control derived from
    internalizing foreign-based manufacturing,
    distribution, or other value chain activities

Non-FDI Based Explanations International
Collaborative Ventures
  • While FDI-based internationalization is still
    common, beginning in the 1980s firms have
    increasingly utilized non-equity, flexible
    collaborative ventures in international market
  • A collaborative venture is a form of cooperation
    between two or more firms. Through collaboration,
    a firm can gain access to foreign partners
    know-how, capital, distribution channels, and
    marketing assets, and overcome government imposed
  • In an international collaborative venture
    partners share this risk of their joint efforts
    and pool resources and capabilities to create

Two Types of International Collaborative Ventures
  • Equity-based joint ventures result in the
    formation of a new legal entity. In contrast to
    the wholly-owned FDI, the firm collaborates with
    local partner(s) to reduce risk and commitment of
  • Project-based alliances do not require equity
    commitment from the partners but simply a
    willingness to cooperate in RD, manufacturing,
    design, or any other value-adding activity.
    Since project-based alliances have a narrowly
    defined scope of activities and timeline, they
    provide greater flexibility to the firm than
    equity-based ventures.