INTERNATIONAL BUSINESS

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INTERNATIONAL BUSINESS

• WHY INTERNATIONALIZE?
• Prof. Maja Makovec Brencic, PhD.
• Professor of International Business and Marketing
• maja.makovec_at_ef.uni-lj.si

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LECTURE 5/6

• WHY INTERNATIONALIZE?
• GLOBAL COMPETITION AND COMPETITIVENESS OF FIRMS
• BUILDING A KNOWLEDGE BASE FOR INTERNATIONAL
  BUSINESS

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ARE WE READY TO GO INTERNATIONAL?

• Different levels of firm readiness to
  internationalize
• Immature
• Adolescent
• Mature
• Industry specifics-the level of being global
• Local
• Potentially global
• Global

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Major Motives for Starting Export (Hollensen,
2004, p. 31)

• PROACTIVE MOTIVES REACTIVE MOTIVES
• profit and growth goals competitive pressures
• managerial urge domestic market (small,
  saturated)
• technology competence/ overproduction/excess
• unique product/services capacity
• unsolicited foreign orders
• foreign market extended sales of seasonal
• opportunities/market products
• information
• economies of scale proximity to international
• tax benefits customers/psychological
  distance

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Triggers of Export Initiation

• INTERNAL TRIGGERS EXTERNAL TRIGGERS
• perceptive management market demand
• specific internal event competing firms
• importing as inward trade association
• Internationalization outside
  experts
• .. And more!

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Export Barriers...

• CRITICAL FACTORS HINDERING EXPORT INITIATION
• insufficient finances
• insufficient knowledge
• lack of foreign market connections and market
  knowledge
• lack of export commitment
• lack of capital to finance expansion into foreign
  markets
• lack of productive capacity to dedicate to
  foreign markets
• lack of foreign channels of distribution
• managment emphasis on developing domestic markets
• cost escalation due to high export manufacturing,
  distribution and financing expenditures

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INTERNATIONALIZATION THEORIES

• The traditional marketing apporoach
• Lyfe cycle
• UPPSALA SCHOOL (INCREMENTAL OR STEP BY STEP
  APPROACH)
• Internationalization/transaction cost approach
• Dunning s eclectic apporach
• BORN GLOBALS
• NETWORKS

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INTERNATIONALIZATION THEORIES

• TRADITIONAL MARKETING APPROACH (Penrose, 1959,
  Prahalad, Hamel, 1990)- core competence of firm
  combined with opportunities in foreign
  environment cost of foreignness is compensated
  by firms advantages
• LIFE CYCLE CONCEPT (Vernon, 1966) firm goes
  through exporting phase before switching to FDI
  and cost-oritented FDI. Technology and marketing
  factors combine to explain standardization, which
  drives location decissions.

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INTERNATIONALIZATION THEORIES

• THE UPPSALA SCHOOL APPROACH (the stage model) a
  sequental pattern of entry into successive
  foreign marekts, coupled with a progressive
  deepening of commitment to each market the
  higher the level of experience, the higher
  intensity of their commitment on foreign markets
• Stage 1 No regular export activities
  sporadic exporting
• Stage 2 Export via independent representatives
• Stage 3 Establishment of a foreign sales
  subsidiary
• Stage 4 Foreign manufacturing
• Not valid for all industries! A bit old-fashioned
  BUT...

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INTERNATIONALIZATION THEORIES

• THE INTERNATIONALIZATION/ TRANSACTION COST
  APPROACH
• Buckley and Cason, 1976 licencing/direct equity
  investment
• Williamson, 1975 internalization of foreign
  expansion (e.g.subsidaries) or externalization
  (collaboration with external partner) by the
  transaction costs analysis the most efficient
  option is implemented internalization theory is
  the TC theory of MNCs

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INTERNATIONALIZATION THEORIES

• DUNNINGS ECLECTIC APPROACH OLI framework
  ownership (possesion of foreign production
  facilities/intangibles ? CA)-location (factor
  endowments) internalization (profitable to firm
  to use and not to sell or give the right to use
  its advantages) the importance of locational
  variables in foreign investment decisions
• NETWORK APPROACH- an international firm can not
  be analyzed as an isolated actor but has to be
  viewed in relation to other actors in the
  international environment such firm is dependent
  on resources controlled by others

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INTERNATIONALIZATION THEORIES

• BORN GLOBALS
• niche markets
• technology and other advantages
• flexibility of SMEs-born global
• global network
• internet born globals
• Often
• SMEs with fewer than 500 employees
• Rely on cutting edge technology in developing
  unique product or process innovations
• Usually managed by entrepreneurial visionaries
• decision maker has a large influence over the
  type of internationalisation followed

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DIRECTIONS OF INTERNATIONALIZATION

• INWARD
• OUTWARD
• COOPERATIVE/NETWORK

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A PREREQUISITE FOR INTERNATIONALIZATION
COMPETITIVE ADVANTAGES!

• National competitiveness
• Competition in industry
• Value chain competitive triangle and
  banchmarking

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If you want to internationalize you need to be
competitive...

• The Porter Diamond
• Factor conditions
• Demand conditions
• Related and supported industries
• Firm strategy, structure and rivalry
• Chance
• Government

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INDUSTRY LEVEL

• Competition analysis in an industry C analysis
  Porters approach
• Analyze
• Market competitors
• Suppliers
• Buyers
• Substitutes
• New entrants

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• Value Chain Analysis
• Competitive triangle
• Benchmarking
• RESOURCES?
• CORE COMPETENCES?

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• BUILDING THE KNOWLEDGE BASE TO GO ABROAD
  INTERNATIONAL RESEARCH AND INFORMATION GATHERING

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NEED FOR RESEARCH!

• Stage 1
• Preliminary screening for attractive country
  markets
• Q1 Which foreign markets need detailed
  investigation?
• Stage 2
• Assesment of industry market potential
• Q2 What is the aggregate demand in each of the
  selected markets?
• Stage 3
• Company sales potential analysis
• Q3 How attractive is the potential demand for
  company products and services?

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Critical International Information

• MACRO DATA MICRO DATA
• tariff information local laws and
  regulations
• export/import data size of market
• nontariff measures local standards and
  specifications
• data on trade policy distribution system
• competitive activity

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Identifying Sources of Data

• SECONDARY DATA
• Governments (statistics, regulations, laws)
• International organizations (www.unctad.org
  www.wto.org etc.)
• Service organizations (consultants, research
  agencies etc.)
• Trade associations (e.g. ICC)
• Directories and newsletters (Euromoney,
  Euromonitor, ...)
• Electronic information services
  (www.stat-usa.gov)
• PRIMARY DATA interviews, focus groups, wom,
  observation, surveys, ...
• Environmental scanning content analysis, delphi
  studies, content analysis
• APPENDIX 10a! Czinkota et al., p 226-347!

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• MARKET SELECTION WHICH MARKET SHOULD WE ENTER?
• ENTRY MODES AND INTERNATIONAL EXPANSION OF FIRMS

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International Market Selection Process(Adopted
from Hollensen, 2004 and Czinkota et al., 2005)

• Segmentation of potential markets
• Regional
• Global
• Global/local
• MARKETS/CUSTOMERS

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9 Ws to Answer

• Who buys our product/service?
• Who does not buy our product/service?
• What need or function does our product/service
  serve?
• What problem does our product/service solve?
• What are customers currently buying to satisfy
  the need or solve the problem for which our
  product/service is targeted?
• What price are they paying for the
  products/services they are currently buying?
• When/Where/Why is our product/service purchased?

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A Screening Model

• DEFINING CRITERIA
• MARKET POTENTIAL
• TARIFFS AND DUTIES (tariff systems and customs
  valuation, type of duties)
• non-tariff barriers (qoutas and trade control,
  discriminatory procurement policies, restricive
  customs procedures, selective monetary controls
  and disricminatory exchnege rate policies,
  restrictive administrative and technical
  regulations)
• SHIPPING COSTS
• PRODUCT/SERVICE FIT
• SCREENING OF MARKETS/COUNTRIES/CUSTOMERS
• ATTRACTIVENESS OF MARKETS - COMPETITIVE POSITION
  MATRIX
• SEGMENTING OF MARKETS (standard criteria
  demographic, geographic, buyer behaviour, ...)

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ENTRY MODES AND STRATEGIES

• Exporting (direct/indirect)
• Intermediate
• Investment (hierarchical)
• Difference by
• RISK/CONTROL/FLEXIBILITY

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Indirect exporting

• Working through your company or domestic exporter
• Using export buying agent, broker, export
  management company, trading company, piggyback
• PROS
• easy access to international markets low risk
  and low costs
• CONS
• low control, lack of market presence

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Direct Exporting Be Directly in Charge Of Your
Own Exporting

• PROS increased market presence, larger market
  control
• CONS larger costs but still no permanent
  market presence

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Direct Export Modes

• Distributors
• Independent merchants who take possession and
  usually title to goods for resale.
• Usually will seek exclusive rights for a specific
  territory
• Represent the manufacturer/exporter in all
  aspects of sales and service
• May or may not handle other or competing products
• Agents
• Represents an exporting company and sells to
  wholesalers, retailers and sometimes end-users in
  the home country.
• Do not take title to goods
• Typically paid on commission
• May represent other companies products as well

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What Should Agents And Distributors Have?

• Knowledge of the market
• Ability to cover the assigned territory
• Prompt payment
• Good sales organization
• Administrative support warehousing, delivery,
  sales records, sales forecasts (purchase
  forecasts), credit, etc.
• Adequate stocks
• Competitive information
• Marketing research, advertising and promotional
  support
• A marketing plan
• Ability to work together

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Intermediate Modes of Entrance to the Markets

• Contract Manufacturing
• Licensing
• Franchising
• Joint Ventures/ Strategic Alliances

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Contract Manufacturing

• Allows the firm to have foreign production
  without making a final commitment
• Lack of resources, capacities or lack of the will
  to to invest in production
• Concentration on other functions rahter than
  production, e.g. RD, marketing distribution
• Outosurcing in services/business services/special
  knowledge

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Licencing

• Licensing a foreign company to use a
  manufacturing process, trademark, patent or
  formula in return for a fee. Includes an
  agreement between the possessor of the
  intellectual property (the licensor) and the
  receiver of the license (the licensee).
• The licensor gains access to a market with
  relativelly low risk.
• Allows the licensor to concentrate on RD and
  core competencies.
• Government regulations on direct investment and
  import barriers may make licensing the only
  alternative.
• However the licencor may be creating a potential
  competitor!

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Payments in Licencing

• A lump sum fixed amount
• A minimum royalty- to guarantee the licensor a
  minimal amount of income
• A continual royalty as a percent of sales

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Franchising

• Selling a business service to investors with
  sufficient capital but often little prior
  business experience.
• Usually used in service and people-intensive
  economic activities (restaurants, retail, hotels,
  banks, insurance, car rentals....)
• Two types
• 1. Product and trade name franchising similar
  to trademark licensing
• 2. Business format package franchising goes
  beyond licensing to include an entire business
  concept or format
• Successful franchisor-franchisee relationships is
  a key!

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Joint ventures/Strategic Alliances

• Forming a partnership with a local firm
• PROS
• Access to market (culturally, politically, ...)
• Shared costs and risk
• Builds goodwill with host government (FDI
  regulations, investment climate)
• CONS
• Unreliable partners
• Different goals and objectives of partners

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Hiearchical/Investment Modes

• The firm controls the mode of entry
• Allows the firm to maintain control and shows a
  commitment to the customer that agents or
  distributors may lack
• Higher risk, lower flexibility!

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Types of Investment Modes

• 1. Domestic-based sales representative
• Appropriate when order taking is the main sales
  task
• 2. Foreign-based sales operations
• May be necessary when product is highly technical
  or complex in nature
• Resident sales representative
• Foreign sales branch
• Foreign sales subsidiary

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• Sales, Production Facilities and Assembly
  Operations
• Why establish production in foreign market?
• to save costs labour, raw materials and
  transport
• to avoid government restrictions
• to defend existing business by showing commitment
• to existing customers
• to gain new business by showing commitment to the
  market

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4. Establishing Wholly-Owned Facilities

• 1. Acquisition teking over an existing business
• quick entry and may provide access to
  distribution channels and existing customer base
• might be the only feasible way to establish
  operations when the market is saturated, highly
  competitive or has substantial entry barriers
• 2. Greenfield investment building from the
  ground
• may be necessary when acquisition targets are
  unavailable, too costly or obsolete
• 3. Brownfiled investment combination of existing
  business and upgrading investment

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• INTERNATIONAL BUSINESS AND RISK

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Why is International business more risky?

• International business is more prone to risk,
  because (Buckley, 2004)
• Companies are operating and doing business in a
  less known socio-economic environment ? they
  harder understand the cause-and-effect mechanisms
  in such environment (i.e. change of government)
• Differences in language, culture and religion
• Harder collection of important data and
  information about the environment and potential
  partners
• Additional political and economic factors, i.e.
  changing currency rates
• Longer physical distances (different
  transportation modes)
• Higher transportation costs
• Longer time window for something to go wrong
• Usually bigger transactions (in terms of size and
  value)
• More complex logistics and management issues
• Thus, companies must be aware of different
• sources and types of risk and take measures
• to minimize them!

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Types of risk in Int. business
COUNTRY RISK
FINANCIAL RISK
BUSINESS RISK

• RISK ASSOCIATED
• WITH ALL BUSINESS
• PROCESS AND
• ACTIVITIES
• Innovations
• Product design
• Marketing
• HRM
• Administration
• Documentation
• Transport

POLITICAL RISK
PAYMENT RISK
ECONOMIC LEGAL RISK SOURCES

• MARKET RISK
• Currency risk
• Interest risk
• Price risk

Source Tayeb, 2000.
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Risk type 1 COUNTRY RISK
www.youtube.com/watch?vkXpB5JwpJFk
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Country risk

• Country risk all economic, political, legal,
  financial and social aspects, which impact doing
  business in an international environment
• Key questions?
• How to determine the key risk factors of country
  risk?
• How to predict key country risk factors for the
  future?
• Which country risk factors are more and which
  less important?
• How to compare the country riskiness of two
  environments?
• All is relative!!!

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Analysis of country risk

• Analysis of political risk
• Wars and political conflicts
• Terrorism and kidnappings
• Confiscation, expropriation and
• nationalization
• Corruption
• Government policies
• Monetary policies and so called
• transfer risks
• FOCUS corruption
• www.youtube.com/watch?voxlPyvRzMJMfeaturerelate
  d

• Macroeconomic risk
• Monetary policy
• Fiscal policy
• Currency exchange policy
• Foreign trade policy
• GDP growth
• Inflation
• Unemployment
• FDIs

• Legal environment risk
• Intellectual rights
• Ecology
• Tariffs and regulation on trade
• Taxes
• Regulation of products and services
• Accountability

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Transparency int. corruption perception index
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Analysis of country risk
2 approaches in practice

• In advanced prepared
• country reports
• BERI index
• Control Risk Group (CRG)
• Euromoney
• Economist Intelligence Unit (EIU)
• Moodys Investor Service and Risk
• Payment Review
• Coface
• Export Credit Agencies (ECAs)
• Euromoney Country Assessment
• Political risk 25
• Economic performance 25
• Indebtedness 10
• Servicing loans 10
• Credit ratings 10
• Access to various finance

• Own analysis
• PEST analysis
• PESTL analysis
• SWOT analysis
• Porters 5 forces analysis (industry)
• C-analysis
• Other analysis important to firm and
• industry specific

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Example Coface

• www.coface-usa.com/CofacePortal/US_en_EN/pages/hom
  e/wwd/inform/Country_risk/Country20Risk20Assessm
  ent

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Example BERI index
Very good
Some risk
High risk
www.beri.com
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Example Doing business in
www.doingbusines.org
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Protection / minimization of country risk

• Insurance (ECAs, insurance agencies, etc)
• Integration with the host environment
• Building political support at home and abroad
• Moving profits through transfer pricing
• Alternative business transactions
• Barter
• Compensation
• Counterpurchase
• Offset transactions
• Switch trading
• Swap deals.

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Risk type 2 FINANCIAL RISK
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Financial risks

• All unexpected changes in value of assets and
  liabilities of an internationally active company!
• Types of financial risks

FINANCIAL RISKS
PAYMENT RISKS
MARKET RISKS
Buyer doesnt pay
Market change
Commercial reasons (liquidity)
Non-commercial reasons (conversion restr.)
Change in currency rate
Change in interest rate
Change in prices
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Protection against payment risk

• Running a check on a customers financial health
• Appropriate financial instrument
• Insurance of liabilities (insurance company,
  ECAs, etc)
• Following up and monitoring liabilities
• Offering discounts for early payment
• Maximum overdraft for different customer types
• Compensation
• Advanced forms of financing (factoring,
  forfeiting)
• Also some simple procedures, like
• Calling one of the customers customers or
  suppliers
• Reading their annual report
• Asking for proof of sound financial health

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Examples of market risks

• Example currency rate changes
• A Japanese computer manufacturer sells 1.000 PCs
  to a German retailer, for 500 EUR per PC. The
  arranged payment currency is EURO and the amount
  has to be paid in 30 days.
• What happens if the EURO falls (depreciates)
  against the Yen in 30 days?
• How does this change impact the German buyer?
• How does this change impact the Japanese buyer?
• Similar also holds for interest risk and price
  risk!

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Protection against market risk

• Use of special financial instruments futures and
  forwards
• Options
• Insurance of currency rate change (but it costs
  money!)
• Legal instruments contractual clauses of foreign
  currency
• Agreements of sharing the market risks
• Swap transactions

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Risk type 3 BUSINESS RISK
Examples of two big business mistakes!
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Business risks

• May arise in all business processes, which take
  place in the functioning of the company, and can
  span from technological innovation mistakes, to
  product design mistakes, to marketing mistakes,
  to production mistakes, to HRM mistakes.
• Most common business risk in Int. business
• Risk associated with various types of
  documentation
• Risks associated with pricing and calculations
• Transportation risks
• Manipulation risks
• Marketing faux pas

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Protection against business risks

• Documentation
• Experienced staff
• Systematic tracking and IT systems
• Outside help
• Pricing and calculations
• Knowing your cost structure
• Knowing your Incoterms clauses
• Negotiate not only on the price, but also
  currency, payment deadliness
• Transportation and manipulation
• Transport insurance
• Lloyd's insurance policy
• Packaging
• Penalties
• Marketing
• Information is key to every marketer!!!
• Analysis, analysis and analysis