International Business – Midterm Review

AFM 333 Midterm Review Module 1 supervene of Berlin Wall 1989 Two Trends altering globose mart orbiculateization of commercialize places and scientific advances orbit(a)isation interconnectedness of national economies, suppuration interdependence of emptors, evolvers and suppliers in divergent countries G6 economies US, UK, Japan, Ger much, France, Italy Account for half of global consumption with only 1/10 of mental root word B6 economies China, India, Russia, Brazil, Mexico, South Korea China is the biggest market for phones, TVs, and cars in 2007 China and India arrive at more middle class ho engagementholds than all of the ho intentholds in the United States harvest-feast in B6 more than 3x the growing in G6 economies 62 Multinationals in occurrence world(prenominal) 500 20 of these multinationals be in China 12 from South Korea 6 from India 5 from Mexico and 5 from Russia B6 have three time the labour force of G6 countries 33 cardinal university -educated young professionals in exploitation realness comp ard to 14 million in the developed world 00 000 IT Engineers in India vs. 50 K in US In the decade to 2020, the working-age usualwealth of acclivitous economies is expected to affix by more than 500 million, comp atomic number 18d with an increase of only 3. 7 million in developed economies. Drivers of food market globalization 1. Reduction of mountain and enthronisation barriers 2. Market Liberalization move to market establish economies + adopt free dole out in China + Soviet Union etc. 3. Industrialization + Modernization + developing economies creating mettle moster think of adding products 4.Integration of World Financial Markets international banks, globalization of finance 5. Advances in engineering reduces equal and time, improves coordination and conference, facilitates development, helps share information/ selling, virtual space removes distance Dimensions of Market Globalization integration/in terdependence of global economies increase neighbourhoodal stinting integration bloc offset of global investment convergence of buyer lifestyles/preferences globalization of occupation activities Social Concequences loss of national s everyplaceignity offshoring/outsourcing jobs effects on the poor, the native environment and national culture Firm-level consequences untried commercial enterprise opportunities new insecuritys and rivalries more demanding buyers (less bar net profiting power to supplier) international note value range of mountainss Phases of Globalization 1. 1830-1880 Introduction of railway and ocean transport (trains and ships) + phone and telegraph invented 2. 1900-1930 change magnitude steel and electricity production + horse opera Europe most industrialized artless so established first multinational subs by means of colony (Nestle, Shell, BP) 3. 948-1970 Form general agreement on tariff and shift + risque demand for consumer products a nd input goods to rebuild after the war 4. 1980- instanter ancestor advances in IT, communication, manufacturing, consultation, and privatization. Caused by Commercialization of the personal computer. Arrival of the Inter last-place and the weave browser. Advances in communication and manufacturing technologies. Collapse of the Soviet Union and ensuing market liberalization in central and Eastern Europe. Substantial industrialization and modernization efforts of the East Asian economies including China.gross domestic product growth rates graduate(prenominal)est in developing economies who try global integration Information travels faster now than ever in advance (ships/carraiges, steamships/cars, motor vehicles/aircraft, internet (speed of light)). Firm Level Consequences of Globalization international value cooking stove demanding buyers increased rivalry and competition increased opportunity for blood line Management must change focus Must severalisener and source better look for productivity and operational efficiency gains find and poster key global strategic assets of org. International Business trade and investment activities of firms across borders Globalization economical integration and growing interdependency cosmopolitan Theories of Trade mer seattilism national prosperity = positive balance of trade (trade surplus) absolute return principle produce only products for which your inelegant/ component part has an absolute reinforcement comparative advantage principle both countries produce even if one has absolute advantage in all products, telling efficiency matters, specialize in what you produce go around and trade for the light you can use scarce resources more efficientlyNational Comparative prefers China first gear cost labour India IT workers in Bangalore Ireland service saving Dubai knowledge ground economy Comparative Advantage = topnotch features with unique benefits in global market either natu rally endowed or put in place by means of national policy NATIONAL Competitive Advantage = distinctive competencies of a firm from cost, size, innovation that are difficult for competitors to double FIRM Factor Proportions/Endowments surmise = produce and export products that use exuberant factors of production and import goods that use scarce resourcesLimitations of Early Trade Theories they dupet account for cost of international transport tariffs and import restrictions distort trade f downcasts economies of scale bring astir(predicate) additional efficiencies low cost capital now available on global markets How do Nations sharpen Competitive Advantage g everywherenments can proactively implement policies to subsidize and stimulate the economy away of natural endowments manufacture national economic advantage through innovation stimulus, target industries for development, provide incentives and low cost capitalNational Industrial form _or_ system of governmen t economic development plan by public sector to name and stick up promising industries through tax incentives, monetary/fiscal policy, unrelenting educational systems, investment in national infrastructure, strong sub judice and regulative systems Example Ireland fiscal, monetary and tax consolidation, partnership of gov with unions, emphasis on high value add industry like pharma, biotech and IT, atomship in EU, investment in education improved gross domestic product, Unemployment and National Debt 3x by 2003 from 1987 Porters Diamond Model Firm Strategy, Structure and Rivalry strong competitors in country serves as national free-enterprise(a) advantage clusters ? Factor Conditions labour, natural resources, capital, technology, knowledge and entreppreneurship ? Demand Conditions strengths and sophistication of consumer demand ? Related and Supporting Industries approachingibility of clusters and complementary firms in the value chain Industrial Clusters concentra tion of suppliers and keep firms in the same regional area ex. silicon valley, Switzerland pharma, fashion in italy/paris, IT in Bangalore export platform for the nationClassical Theories International Product Cycle Theory introduction, growth and maturity of each product and its associated manufacturing INTRO inventor country enjoys a monopoly in manufacturing and exports GROWTH early(a) countries enter the global market place with more standard manufacturing MATURITY original innovator becomes net importer of product Now hard for innovator to corroborate a kick in because there is a short product life cycle invigorated Trade Theory economies of scale important for international performance in some industries.Ex. high fixed costs = high volume gross revenue to breakeven Reasons to Invest Abroad market seek efficiency/cost seeking resource seeking knowledge seeking Why Internationalize? 1. opp for growth through diversification of market 2. higher(prenominal) prof it margins 3. new P&S ideas and business methods 4. serve nodes who have relocated overseas (increase/maintain market) 5. closer to supply sources, use global sourcing advantages, flexibility in sourcing products 6. glide slope to cast down cost/better value factors of production 7. evelop economies of scale in sourcing, production, trade, economies of scale 8. confront international competitors 9. invest in relationship with a exotic partner Nature of International Business value adding activities can be done internationally (source, manufacture, market) cross border trade not limited to raw materials, include capital, tech, knowledge, products, services etc. Internationalize through Export, FDI, Licence, Franchise and JV FDI longterm acquisition of productive assets like capital, tech, labour P&E etc large commitment used to manufacture products in low labour cost countries MNE big company with lots of resources, subs and affiliates in many countries (US, Japan, German y, France, Britain) SME small to medium size enterprise, 500 or fewer employees natural Global Firm young company that initiates business on the global market lucks in International Business 1. Commercial lay on the line lame partnerships, bad timing of entry, high competition, poor execution of strategy, operational problems 2.Currency Risk tax, inflation, asset valuation, transfer pricing, currency exposure 3. Country Risk protectionism/gov intervention, bureaucracy, miss of lawful safeguards/poor leagal system, affectionate/political unrest 4. Cross-Cultural Risk cultural differences, negotiation, different decision making styles, different ethical practices MNE Avenues for social occasion ? Import/Export ? Licencing/Franchising ? Joing Venture ? FDI get progressively more perily, higher investment, higher say-so benefit, higher commitmentIntermediaries Include Distributor extension of firm, coachs goods under their name to sell Manufacturer Rep under contra ct of exporter to rep and sell merch Retailer bypass wholesaler/distributer and sell to retail merchant to sell to customers IKEA, WALMART Trading Company establish in home country, high volume, low margin resellers. Export Management Company US, export agentive role who secures contracts to export goods usually specialize in industries and areas Agent works on commission Licensor Focal firm grants the proper(a) to the foreign partner to use certain capable lieu in tack for royalties Franchisor grant right to use a business system for fees and royalties ICV share cost and risk fo new venture with an some separate company JV create a jointly owned new entitiy with foreign partners Project ground Venture col delveation with a timeline without creating a new entity, common with R&D intensive ventures Facilitator provide services for cross border proceeding Bank, Lawyers, Freight, Consultants, ad agency, custom brokers, insurance companies, tax accountants,Tur nkey Contractor Provide engineering, design, and architectural services in the construction of airports, hospitals, oil refineries, and other types of infrastructure. These projects are typically awarded on the basis of open bidding by the sponsor. Examples- European conduct Tunnel, the Three Gorges Dam in China, Delhi Metro Rail Ltd. and the Hong Kong Airport. Build-own-transfer venture- an change magnitudely habitual type of turnkey contract in the developing economies where contractors acquire an self-possession in the facility for a period of time until it is turned over to the client.MODULE 3 pic Advanced economies are post-industrial countries characterized by high per capita income, highly competitive industries, and well-developed commercial infrastructure. Examples- worlds richest countries and include Australia, Canada, Japan, New Zealand, the United States, and Western European countries. Developing economies are low-income countries characterized by limited industria lization and moribund economies. Examples- low-income countries, with limited industrialization and stagnant economies- e. g. Bangladesh, Nicaragua and Zaire.uphill market economies are a subset of source developing economies that have achieved substantial industrialization, modernization, improved living standards and remarkable economic growth. Examples- some 27 countries in East and South Asia, Latin America, affection East and Eastern Europe- including Brazil, Russia, India, China (so called BRIC countries). pic Advanced Economies 2 4% growth rates mature industrial development travel from manufacturing to service based economies typically democratic political systems and capital economic systems host worlds biggest MNEs Emerging Economies 7 10% growth rates 40% of world GDP 30% of exports 20% of FDI low cost labour and capital, knowledgeable workers, gov support fastest growth rate attractive growing middle class, manufacturing bases, sourcing destinations mark et potential percapita income, size of middle class, GNI, use adjusted GDP for palatopharyngoplasty middle class has some economic independence and discretionary income Hong Kong, Isreal, Saudi Arabia The EMPI combines factors that provide firms with a realistic measure of export market potential Market Size the countrys population, especially urban population Market Growth Rate the countrys real GDP growth rate Market Intensity private consumption and GNI array discretionary expenditures of citizens Market Consumption Capacity The percentage share of income held by the countrys middle class Commercial Infrastructure characteristics much(prenominal) as public figure of mobile phone subscribers, density of telephone lines, number of PCs, density of paved roads, and population per retail outlet economic granting immunity the degree of government intervention Market Receptivity the particular countrys inclination to trade with the exporters country as estimated by the volume o f imports Country Risk the degree of political riskChallenges of doing business with Ems political stability hard to forecast in uncertain conditions beauraucracy/lack of transparence weak IP rights availability of good partners presence of family conglomerates Regional economic integration, refers to the growing economic interdependence that results when countries within a geographic region form an alliance aimed at reducing barriers to trade and investment. 40% of world trade today is under some bloc preferential trade agreement. Premise- mutual advantages for cooperating nations within a common geography, history, culture, language, economics, and/or politics supererogatory trade that results from economic integration helps nations attain higher living standards by encouraging specialization, lower prices, greater choices, increased productivity, and more efficient use of resources. 1. Market access. Tariffs and most non-tariff barriers have been eliminated for trade in pr oducts and services, and rules of origin opt manufacturing that uses parts and other inputs produced in the EU. . Common market. The EU removed barriers to the cross-national figurehead of production factors crusade, capital, and technology. 3. Trade rules. The member countries have largely eliminated customs procedures and regulations, which streamlines expatriation and logistics within Europe. 4. Standards harmonization. The EU is harmonizing technical foul standards, regulations, and enforcement procedures that relate to products, services, and commercial activities. 5. Common fiscal, monetary, taxation, and social welfare policies in the long run.The euro (common currency since 2002) Simplified the outgrowth of cross-border trade and enhanced Europes international competitiveness. Eliminated exchange rate risk in much of the bloc and forced member countries to improve their fiscal and monetary policies. Unified consumers and businesses to think of Europe as a champion marke t Forced national governments to relinquish monetary power to the European Central Bank, in Luxembourg, which oversees EU monetary functions. NAFTA passage (1994) was facilitated by the maquiladora political program U. S. firms locate manufacturing facilities just south of the U. S. order and access low-cost labor without having to pay significant tariffs. NAFTA has Eliminated tariffs and most nontariff barriers for products/services. Initiated bidding for government contracts by member country firms Established trade rules and same customs procedures. Prohibited standards/technical regulations to be used as trade barriers. Instituted rules for investment and intellectual property rights. Provided for dispute settlement for investment, unfair pricing, labor issues, and the environment. Trade among the members has more than tripled and now exceeds $1 trillion per year. In the early 1980s, Mexicos tariffs intermediated 100% and stepwise disappeared under NAFTA. Member countries n ow trade more with each other than with former trading partners outside the NAFTA zone. Both Canada and Mexico now have some 80% of their trade with, and 60% of their FDI stocks in the United States. Mexican exports to the U. S. grew from $50 billion to over $160 billion per year. Access to Canada and the U. S. helped launch numerous Mexican firms in industries such(prenominal) as electronics, automobiles, textiles, medical products, and services. Annual U. S. nd Canadian investment in Mexico rose from $4 billion in 1993 to nearly $20 billion by 2006. Mexicos per capita income rose to about $11,000 in 2007, making Mexico the wealthiest country in Latin America. By increasing Mexicos attractiveness as a manufacturing location, firms like Gap Inc. and Liz Claiborne moved their factories from Asia to Mexico during the 1990s. IBM shifted much of its production of computer parts from Singapore to Mexico. ASEAN Brunei, Cambodia, Indonesia, Laos, Malaysia APEC Asia Pacific Economic Coop Australia, Canada, Chile, US, China, Japan, Mexico CER Aussie and New Zealand removed 80% of tarriffsWhy Nations magnify? 1. Expand market size Regional integration greatly increases the scale of the marketplace for firms inside the economic bloc. Example- Belgium has a population of just 10 million the EU gives Belgian firms easier access to a total market of virtually 490 million. 2. Achieve scale economies and enhanced productivity Expansion of market size within an economic bloc gives member country firms the opportunity to gain economies of scale in production and marketing. Internationalization inside the bloc helps firms limit to compete more effectively outside the bloc as well. fag out and other inputs are allocated more efficiently among the member countries- leading to lower prices for consumers. 3. Attract direct investment from outside the bloc Compared to investing in stand-alone countries, foreign firms prefer to invest in countries that are part of an economic bloc as they receive preferential treatment for exports to other member countries. Examples- General Mills, Samsung, and Tata- have invested heavily in the EU to take advantage of Europes economic integration. By establishing operations in a wholeness EU country, these firms gain free trade access to the entire EU market. 4.Acquire stronger protective and political posture Provide member countries with a stronger defensive posture relative to other nations and world regions- this was one of the motives for the initial creation of the European Community (precursor to the EU). The value chain can be image of as the complete business system of the focal firm. It comprises all of the activities that the focal firm performs. The focal firm whitethorn 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. dingle shoots a variety of products, each with its own value chain. The total supply chain for a notebook computer computer, including multiple tiers of suppliers, involves about 400 companies, primarily in Asia, but in like manner in Europe and the Americas. 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 hat flies to Nashville, Tennessee sixer 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. pic Automotive Industry Manufacturing of the Chevrolet Malibu illustrates national and geographic diversity of suppliers that provide c ontent 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 determine in Fairfax, Kansas. The German automaker BMW employs 70,000 factory personnel at 23 sites in 13 countries to manufacture its vehicles. Workers at the Munich plant build the BMW 3 Series and supply engines and key body components to other BMW factories abroad. In the U. S. , BMW has a plant in South Carolina, which makes over 500 vehicles daily for the world market. In Northeast China, BMW makes cars in a joint venture with wizard China Automotive Holdings Ltd. In India, BMW has a manufacturing presence to serve the call for of the rapidly growing South Asia market. BMW must configure sourcing at the best locations worldwide, in order to minimize costs (e. g. , by producing in China), acces s skilled personnel (by producing in Germany), remain close to key markets (by producing in China, India and the U. S. ). Global sourcing is the procurement of products or services from suppliers or company-owned subsidiaries located abroad for consumption in the home country or a trio country. expert advances, including instant Internet connectivity and broadband availability TECHNOLOGY Declining communication and transportation costs Widespread access to vast information including growing connectivity between suppliers and the customers that they serve and SUPPLY CHAIN Entrepreneurship and rapid economic innovation in emerging markets. GLOBALIZATION Managers must decide between internalization and externalization whether each value-adding body process should be conducted in-house or by an unaffiliated supplier. This is known as the make or buy decision Should we make a product or conduct a particular value-chain activity ourselves, or should we source it from an outside cont ractor? Firms usually internalize those value-chain activities they take on a part of their core competence, or which involve the use of trademarked knowledge and trade secrets that they want to control. Configuration of value-adding activity The pattern or geographic arrangement of locations where the firm carries out value-chain activities. Instead of concentrating value-adding activities in the home country, many firms configure these activities across the world to save money, reduce livery time, access factors of production, and extract maximal advantages relative to competitors. This helps explain the migration of traditional industries from Europe, Japan, and the U. S. to emerging markets in Asia, Latin America, and Eastern Europe. pic Outsourcing refers to the procurement of selected value-adding activities, including production of intermediate goods or finished products, from independent suppliers. This practice of externalizing a particular value-adding activity to outs ide contractors is known as outsourcing. Firms outsource because they generally are not superior at performing all primary and support activities. Most value-adding activities from manufacturing to marketing to after-sales service are candidates for outsourcing. Business Process Outsourcing (BPO). The outsourcing of business functions to independent suppliers such as accounting, payroll, and human resource functions, IT services, customer service, and technical support. BPO includes Back-office activities, which includes internal, upstream business functions such as payroll and billing, and Front-office activities, which includes downstream, customer-related services such as marketing or technical support. Offshoring is a natural extension of global sourcing. It refers to the movement of a business process or entire manufacturing facility to a foreign country. MNEs are particularly active in shifting production facilities or business processes to foreign countries to enhance thei r competitive advantages. Offshoring is especially common in the service sector, including banking, software code writing, legal services, and customer-service activities. E. g. , large legal hubs have emerged in India that provide services such as lottery contracts and patent applications, conducting research and negotiations, as well as performing legal assistant work on behalf of Western clients. With lawyers in N. America and Europe cost $300 an hour or more, Indian firms can cut legal bills by 75 percent. Best Jobs for Offshoring Large-scale manufacturing industries whose primary competitive advantage is efficiency and low cost Industries such as automobiles that have uniform customer needs and highly standardized processes in production and other value-chain activities Service industries that are highly labor intensive, e. g. , call centers and legal recording Information-based industries whose functions and activities can be easily transmitted via the Internet, e. g. , acco unting, billing, and payroll and Industries such as software preparation whose outputs are easy to codify and transmit over the Internet or by telephone, e. g. routine technical support and customer service activities. pic Cost efficiency is the traditional rationale for sourcing abroad. The firm takes advantage of labor arbitrage the large wage gap between ripe economies and emerging markets. One study found that firms expect to save an average of more than 40% off baseline costs as a result of offshoring. These savings tend to occur particularly in R&D, product design activities, and back-office operations such as accounting and selective information processing. Benefits of Outsourcing Faster corporate growth. Access to qualified personnel abroad. Improved productivity and service. Business process redesign. Increased speed to market. Access to new markets. Technological flexibility. Improved agility by shedding unnecessary overhead. Disadvantages to Outsourcing Vulnerability to exchange rate fluctuations Partner selection, qualification, and monitoring costs Increased complexity of managing a worldwide network of production locations and partners Complexity of managing global supply chain Limited influence over the manufacturing processes of the supplier Potential vulnerability to expedient behavior or actions in bad faith by suppliers restrict ability to safeguard intellectual assetsRisks in Global Sourcing 1. Less-than-expected cost savings. Conflicts and misunderstandings stand up because of differences in the national and organizational cultures between the focal firm and foreign supplier. Such factors give rise to cost-savings that are less than originally anticipated. 2. environmental factors. Numerous environmental challenges confront focal firms including exchange rate fluctuations, labor strikes, adverse macro-economic events, high tariffs and other trade barriers, and high energy and transportation costs. 3. Weak legal environment.Many popula r locations for global outsourcing have weak laws and enforcement regarding intellectual property, which can lead to erosion of key strategic assets. 4. Risk of creating competitors. As the focal firm shares its intellectual property and business-process knowledge with foreign suppliers, it excessively runs the risk of creating future rivals (e. g. , Schwinn). 5. Inadequate or low-skilled workers. Some foreign suppliers whitethorn be staffed by employees who lack appropriate knowledge about the tasks with which they are charged. Other suppliers suffer rapid turnover of skilled employees. 6. Over-reliance on suppliers.Unreliable suppliers may put earlier work aside when they gain a more important client. Suppliers occasionally encounter financial difficulties or are acquired by other firms with different priorities and procedures. Over-reliance can shift control of key activities alike much in favor of the supplier. 7. Erosion of morale and commitment among home-country employees. Global sourcing can create a situation in which employees are caught in the middle between their employer and their employers clients. At the extreme, workers find themselves in a psychological limbo, unclear about who their employer really is.