International Business. Globalization - the shift toward a more integrated and interdependent world economy
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1 International Business Globalization - the shift toward a more integrated and interdependent world economy International Monetary Fund: maintains order in international monetary system; lender of last resort World Bank: promotes economic development via low interest rate loans Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country Greenfield investments: the establishment of a wholly new operation in a foreign country (in developing countries = 2/3 of FDI) Licensing: granting a foreign entity the right to produce and sell the firm s product in return for a royalty fee on every unit the foreign entity sells How has FDI changed over time FDI inflows multinational enterprise is any business that has productive activities in two or more countries Gross National Income (GNI): measures the total annual income received by residents of a nation, does not consider differences in cost of living Human Development Index (HDI) to measure the quality of human life in different nations The risks of doing business in a country are a function of Political risk - the likelihood that political forces will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise
2 Legal risk - the likelihood that a trading partner will opportunistically break a contract or expropriate property rights Country attractiveness Mercantilism: it is in a country s best interest to maintain a trade surplus (EX > IM); trade is a zero-sum game Adam Smith argued that a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it Without trade Ghana would produce 10 tons of cocoa and 5 tons of rice South Korea would produce 10 tons of rice and 2.5 tons of cocoa With specialization and trade Ghana would produce 20 tons of cocoa South Korea would produce 20 tons of rice Ghana could trade 6 tons of cocoa to South Korea for 6 tons of rice Comparative advantage: countries should specialize in the production of those goods they produce most efficiently and buy goods that they produce less efficiently from other countries Heckscher-Ohlin Theory: comparative advantage arises from differences in national factor endowments; export goods that make intensive use of locally abundant resources, import goods that make intensive use of locally scarce factors Leontief Paradox: US exports were less capital intensive than US imports, which is at variance with the Heckscher-Ohlin Theory. product life-cycle theory - as products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade globalization and integration of the world economy has made this theory less valid today
3 New trade theory suggests that the ability of firms to gain economies of scale (unit cost reductions associated with a large scale of output) can have important implications for international trade first-mover advantages - the economic and strategic advantages that accrue to early entrants into an industry Porter s Diamond of Competitive Advantage Source: Reprinted by permission of Harvard Business Review. Exhibit from The Competitive Advantage of Nations, by Michael E. Porter, March-April 1990, p. 77. Copyright 1990 by the Harvard Business School Publishing Corporation; all rights reserved. Free Trade occurs when governments do not attempt to restrict what citizens can buy from another country or what they can sell to another country. Governments intervene in markets: Tariffs Subsidies Import Quotas Voluntary Export Restraints Local Content Requirements demand some fraction be produced domestically Administrative Policies bureaucratic rules Antidumping Policies Infant industry argument: an industry should be protected until it can develop and be viable and competitive internationally Levels of economic integration
4 law of one price states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency Strategic Positioning on the efficiency frontier Pressures for Cost Reductions and Local Responsiveness Environmental Analysis (PEST-CEL) Political Economic Social Technological Culture Ethical Legal
5 The link between strategy and architecture First-mover advantages include the ability to preempt rivals by establishing a strong brand name the ability to build up sales volume and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants the ability to create switching costs that tie customers into products or services making it difficult for later entrants to win business How firms can enter foreign markets: Exporting Turnkey projects Licensing: licensor grants the rights to intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee Franchising: specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does Joint venture: jointly owned by two or more independent firms Wholly-owned subsidiary: firm owns 100% of stock Greenfield strategy: build a subsidiary from the ground up a greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture Acquisition strategy: acquire an existing company May be better when there are well-established competitors Strategic Alliance: cooperative agreements between potential or actual competitors Attribution: All information obtained from course notes and slides, as adapted from Hill, C.W. (2014). International Business: Competing in the Global Marketplace, 10 th Edition. McGraw-Hill/Irwin.
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