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Global Business Environment: Going Global to Stay Local?


Global Business Environment: Going Global to Stay Local? Lecture 1 Role of FDI: Flying Geese Model Production - export FDI - import. First wave of FDI from Japan ... – PowerPoint PPT presentation

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Title: Global Business Environment: Going Global to Stay Local?

Global Business EnvironmentGoing Global to Stay
  • Lecture 1

The Course
  • Why the need for firms to go global?
  • Global Business Environment, trends in key
  • 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
  • Control factor in international business

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

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
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
Difference between Domestic and International
  • In additional to domestic business management
    skills, international business management
  • 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?

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
  • Movement of workers from another country?
  • No to the policy of Self-Reliance?

Motivation for consumers More variety, better
quality, lower prices
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)
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
  • 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
  • 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 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?

Growth in Global Export (Merchandise)
How has Indias merchandise export suffered, due
to imbalances in Global Market?
Growth in Global Export (Service)
How has Indias service export suffered, due to
imbalances in Global Market?
Who are the prominent exporters? Global
Merchandise Export Market Share ()
Is business / trade mainly created by Price
Who are the prominent exporters? Global Service
Export Market Share ()
Is GDP growth affected by external factors, e.g.,
oil supply?
Recession and Global FDI (US Bn.)
WIR (2012)
Global Recession and Commodity Prices
  • Major Commodity Price boom in 2008 for several ,
  • 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

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?

The Lesson So Far ..
  • No business is now purely internal barring few
    exceptions, and hence internationalization is an
    important strategy for firms given foreign
  • 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
  • Role of Economic Diversification and moving up
    the value chain is important

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
  • 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
  • Where and How to Source? Exploitation of key
  • 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
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.
20th Century Revolution
Source Hummels
Operations and Influences
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.
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?
And how the countries Gain?
  • Lord of the Rings Filming locations in New
    Zealand are now great tourist attractions

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
  • 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

International Strategy Lifecycle
Selling Products or Services Outside a Firms
Domestic Market
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?
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 ..
Indias advantage?
How Did Japanese FDI Travel?
  1. Phase 1 1970s -
  1. Phase 2 1980s -
  1. Phase 3 1990s -

FDI - Production
  1. Phase 2 2000s -

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,
  • China investments and contract farming in
    commodities like maize, sugar and rubber in the
    Mekong region, especially in Cambodia and Lao
  • Zambeef (Zambia) investment in Ghana and
  • Grupo Bimbo (Mexico) investment across Latin
    America and the Caribbean (potato, cereals).
  • Food security led investment South Korea and GCC

Role of SWFs Agricapital (a State-owned fund
based in Bahrain) is investing in food crops
overseas to support its governments food
security policies.
Policy Issue for a country Export Promotion or
Import Substitution?
X or M?
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
  • Late entry and industrial structure
  • Infant Industry and Optimum Tariff Argument

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
  • 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
Levels / Terms of International Companies -
  • 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,
  • Globally integrated company integrated
    operations located in different countries -
    integrate various country operations into an
    international headquarters control (Global
  • Multidomestic company multinational companies
    that allow local responsiveness country offices
    have power to operate autonomously (Multidomestic
    strategy) e.g. McDonald and Maharaja Mac in

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

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, 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
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,
  • To gain reciprocal advantages
  • To attack problems that one country alone cannot
  • To deal with concerns that lie outside the
    territory of all countries
  • Trade barrier reduction (WTO)
  • Convention on Transit Trade of Land-locked States
  • 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

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