1-1 Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall. Franck D. NASSIRI Skema Busiess School

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1 1-1 Franck D. NASSIRI Skema Busiess School

Chapter Learning Goals 1. Understand the global business environment and how it affects the strategic and operational decisions that managers must make, 2.

2 Chapter Learning Goals 1. Understand the global business environment and how it affects the strategic and operational decisions that managers must make, 2. Critically assess the developments, advantages, and disadvantages of globalization, 3. Review the role of technology in international business, 4. Develop an appreciation for the ways in which political, economic, legal, and technological factors and changes impact the opportunities that companies face, 5. Discuss the complexities of the international manager s job. 1-2

3 Our new world From the «Agricultural era», through the industrial age, to our new «knowledge civilization» 1-3

Our new world In the «Agricultural era», economics mainly dealt with land usage, It focused on maximizing the crop yield while maintaining a good soil ecosystem, «Industrial Economics», focused on

4 Our new world In the «Agricultural era», economics mainly dealt with land usage, It focused on maximizing the crop yield while maintaining a good soil ecosystem, «Industrial Economics», focused on the study of firms, industries, and markets. It helps to understand: ü The levels at which capacity, output, and prices are set, ü How work and processes should be organized & optimized in an industrial context. 1-4

Our new world The «knowledge economy» is a system of consumption and production that is based on intellectual capital, Today, the knowledge economy commonly represents a large share of all economic

5 Our new world The «knowledge economy» is a system of consumption and production that is based on intellectual capital, Today, the knowledge economy commonly represents a large share of all economic activities in developed countries, In a knowledge economy, ü a significant part of a company's value may consist of intangible assets. ü Economy that is more dependant on information, its accessibility and knowledge rather than on means of production, ü Increasing need for continuous learning, 1-5

6 Our new world On the eve of the 4th industrial revolution ü ArtificiaI Intelligence built on «deep learning» and «neural networks», ü Our cars are going to be our favorite robots, ü Software will write software, ü Robots can learn from each other. 1-6

7 Is the world getting worse? Extreme poverty has fallen: population living on less than $1.25 a day, from 53 percent in 1981 to 17 percent in 2011, Undernutrition (hunger) is falling, The Global Alliance for Improved Nutrition (GAIN), Child labour has declined: 1950, 25% of children between 8 and 14 worked - now less than 10%, 1-7

8 Is the world getting worse? Life expaectancy is rising, in 1800 no country above 40 years, Global literacy is up: 1900, 21% - Now, 86%, More countries are democracies: 1900, , 125, Number of war deaths declining, 1-8

9 Economic Crisis Spreads Through Financial Globalization What caused the global economy to collapse? Finance has become one of the most international industries Subprime mortgage mess ü ü 2000: dotcom bubble, accounting scandals, 2001, terror attack WTC ü Keep the recession away: low IR (from 6.5 to 1.75%) ü Cheap money & easy credit for borrowers with no income, no job, no asset, no down payment: realized the life s dream of acquiring a home, ü ü Rush for gold : Upward spiral of home prices, Banks repackaged loans into collateral debt obligations and passed them to investors/banks througout the world, 1-9

Economic Crisis Spreads Through Financial Globalization Troubles began in 2004 when IRs started rising and home ownership reached a saturation point (70%), Home prices started to fall in late 2005,

10 Economic Crisis Spreads Through Financial Globalization Troubles began in 2004 when IRs started rising and home ownership reached a saturation point (70%), Home prices started to fall in late 2005, Subprime borrowers could not afford higher IR and started to default on their loans, In 2006, IR reached 5.25%, Subprime lenders filed for bankruptcy, Failure of banks and other financial institutes. 1-10

11 Typical Challenges that Managers Face in the 21 st Century Political and cultural differences Global competition Terrorism Technology (self-driving car: Nvidia, Mobileye) Finding ways to balance their social responsibilities, their images, and their competitive strategies 1-11

12 What is International Management? The process of developing strategies, designing and operating systems, and working with people around the world to create and maintain competitive advantage, 1-12

13 What is Globalization? Global competition characterized by networks of international linkages that bind countries, institutions, and people in an interdependent global economy. 1-13

14 What leaders said about Globalization The global economy is giving our people, and billions around the world, the chance to work and live and raise their families with dignity President Bill Clinton What the poor world needs is not less globalization but more. Their injustice is not globalization but being excluded from it» Tony Blair 1-14

15 Global trends Key global trends: ü Changing balance of growth and economic power towards emerging markets ü Need for increased productivity and consumption in developed countries ü Increasing global interconnectivity ü Challenge for governments to develop policies for economic growth and financial stability 1-15

Challenges to Globalism Backlash against capitalism and rekindling of nationalism: Western hostility toward an takeovers Increased protectionism of high-demand resources : Nationalization of energy

16 Challenges to Globalism Backlash against capitalism and rekindling of nationalism: Western hostility toward an takeovers Increased protectionism of high-demand resources : Nationalization of energy resources in Venezuela Need to develop top managers with international understanding and experience: 65% of Procter and Gamble s sales are outside of its home market Increasing pressure and publicity for companies to consider the social responsibility of their actions 1-16

17 Benefits of Globalism Access to more markets Growth of developing economies Opportunities for flexibility and efficiency Opportunities for small and medium-sized enterprises (SMEs) 1-17

Regional Trading Blocks: The TRIAD ü ü ü What is emerging is a world economy of blocs represented by: NAFTA US, Canada, and Mexico, 444 M people EU 500 M people ASEAN 600 M people

18 Regional Trading Blocks: The TRIAD ü ü ü What is emerging is a world economy of blocs represented by: NAFTA US, Canada, and Mexico, 444 M people EU 500 M people ASEAN 600 M people Much of today s world trade takes place within these three regional free-trade blocs, These trade blocs are continually expanding their borders to include neighboring countries. 1-18

19 ASEAN members 1-19

20 Regional Trading Blocks: The TRIAD Much of today s world trade are grouped around three dominant currencies: euro, yen, and the dollar 1-20

poses two challenges for global managers: Multiple

21 The European Union EU A unified market of 27 nations Free movement of goods and people ü ü ü EU poses two challenges for global managers: Multiple cultures Multiple economic profiles Competitiveness 1-21

22 Other blocs and agreements America: Central America Free Trade Agreement (CAFTA) MERCOSUR Brazil Asia: Japan India China 1-22

Other Regions in the World The Russian Federation: characterized by economic growth, a large supply of natural resources, and a large, well-educated population but it also is affected by corruption

23 Other Regions in the World The Russian Federation: characterized by economic growth, a large supply of natural resources, and a large, well-educated population but it also is affected by corruption and government interference. (Oligarchs) Middle East The African Union AU South Africa Many countries in Central and South America, the Middle East, and Africa are considered LDCs (Less Developed Countries). They often hope to attract foreign investment, 1-23

24 NAFTA CNN 01/23/17 : President Donald Trump is "expected to sign an executive order as early as Monday to renegotiate" the North American Free Trade Agreement with Canada and Mexico, 1-24

25 Trans-Pacific Partnership WASHINGTON 01/23/17 President Trump formally abandoned the Trans-Pacific Partnership on Monday, pulling away from Asia and scrapping his predecessor s most significant trade deal on his first full weekday in office, administration officials said. 1-25

26 Comparative Management in Focus: China Until 2010, China grew at 10 percent for 30 years, declining to 7.3 percent in 2014 Growth of 7 percent for 2015 was called a new normal by Premier Li Keqiang China is a developing country, with differences between urban and rural areas China is the second-largest trading partner with the United States State firms play a significant or dominant role 1-26

27 Comparative Management in Focus: China However: China s legal and regulatory system is arbitrary Political goals and agendas often take precedence over commercially based decisions 1-27

28 Management Focus: Tips for doing business in China Connections are important Negotiations will be different from the U.S. and difficult Communication must be clear, honest, and fully prepared for Culture matters 1-28

Comparative Management in Focus: Intel Brings Changes to Vietnam s Economy and Culture United States opened trade relations with Vietnam in 2000.

29 Comparative Management in Focus: Intel Brings Changes to Vietnam s Economy and Culture United States opened trade relations with Vietnam in Vietnam s rapid growth can be contributed to those aspects of globalization that attracts corporations such as Intel. Intel is taking advantage of new markets and lower costs of production. Intel has demonstrated how multinationals which are industry leaders can change the economic and cultural dynamic in a developing country by the decision to locate a plant there 1-29

30 The Global Manager s Role 1-30

31 The Global Manager s Role Managers need to analyze the new environment, anticipate how it may affect the future of the company, and then develop appropriate strategies and operating styles, In this process, Risk assessment is a central point. 1-31

32 Top risks: Survey by Aon Risk Solutions company in 2011 Risks vary from one region to another, Example: «Failure to attract/retain top talent is far higher on the list for the Asia Pacific region than for the others, 1-32

33 Top risks: Survey by Aon Risk Solutions company in 2011 (960 firms in 58 countries) 1. Economic slowdown 2. Regulatory/legislative changes 3. Increasing competition 4. Damage to reputation/brand 5. Business interruption 6. Failure to innovate/meet customer needs 7. Failure to attract or retain top talent 8. Commodity price risk 9. Technology failure/system failure 10. Cash flow/liquidity risk 1-33

34 Political Risk Any governmental action or politically motivated event that could adversely affect the long-run profitability or value of a firm Venezuela took control of cement plants and offices belonging to Mexico, after failing to reach an agreement in nationalization talks. 1-34

managerial decision making Dishonesty by government officials Political Risk Assessment Helps companies manage

35 Political Risk Typical Political Risks Expropriation and confiscation Nationalization Terrorism Macro-political risk event Micro-political risk event Discriminatory treatment Barriers to repatriation of funds Interference in managerial decision making Dishonesty by government officials Political Risk Assessment Helps companies manage exposure to risk and minimize financial loss Two forms: ü Consultation with experts ü Development of internal staff capabilities 1-35

(changing name, management style, ) Development assistance (involving local resources and services) Dependency and

36 Managing Political Risk Avoidance and Adaptation Equity sharing (joint ventures with nationals) Participating management (involving local authorities, institutions into the managerial processes) Localization of the operation (changing name, management style, ) Development assistance (involving local resources and services) Dependency and Hedging Input control Market control Key positions control Political risk insurance (OPIC and FCIA) Local debt financing 1-36

37 Managing Terrorism Risk Develop a benevolent image (IBM and Exxon). Maintain a low profile and minimize publicity. Using teams to monitor terrorist activities Hiring counterterrorism consultants 1-37

Economic Risk Is closely related to political risk Is determined by a country s ability or intention to meet its financial obligations Historically, most

38 Economic Risk Is closely related to political risk Is determined by a country s ability or intention to meet its financial obligations Historically, most industrialized nations have posed little risk of economic instability 1-38 However the level of economic risk in Europe is of concern in the eurozone due to debt problems in Greece

39 Categories of Economic Risk Loss of profitability due to changes in monetary and fiscal policies Loss of profitability due to changes in foreign investment policies (inability to repatriate earnings) Risk of currency exchange rate volatility results in currency translation exposure 1-39

40 Managing the Economic Risk Quantitative Approach Qualitative Approach Checklist Approach Combination of these Methods 1-40

41 The Legal Environment Consists of: ü The local laws and legal systems of those countries in which an international company operates and, ü Of international law, which governs relationships between sovereign countries 1-41

The Legal Environment Types of Legal Systems Common law (uses past

organized into code) Islamic law (combines religeous beliefs, common

by the parties concerned to establish a set of rules to govern a

42 The Legal Environment Types of Legal Systems Common law (uses past court decisions as precedents) Civil law (comprehensive set of laws organized into code) Islamic law (combines religeous beliefs, common and civil laws) Approaches to Contract Law A contract is an agreement by the parties concerned to establish a set of rules to govern a business transaction In Asia the contract may be in the relationship, not on the paper 1-42

43 Other Regulatory Issues Protectionist policies, such as tariffs or quotas (Local first) The attractiveness of the tax system The level of government involvement in the economic and regulatory environment (Canada, France) 1-43

44 The Technological Environment The appropriability of technology The International Convention for the Protection of Industrial Property (the Paris Union) Inappropriate use of technology by others Appropriateness of technology for the local environment 1-44

45 Global E-Business E-Business the integration of systems, processes, organizations, value chains, and entire markets using Internet-based and related technologies and concepts E-Commerce marketing and sales process via the internet B2B Business to Business B2C Business to Customer 1-45

Study Questions. Lecture 1 Overview of the World Economy

Study Questions. Lecture 1 Overview of the World Economy Study Questions (with Answers) Page 1 of 5 (6) Study Questions Lecture 1 of the World Economy Part 1: Multiple Choice Select the best answer of those given. 1. How many countries are there in the world?