Transcript International Business Introduction (1-25-10)

A Generalized Survey of
International Business
International Business
January 25,2010

International business is the performance of trade and
investment activities by firms across geographic borders

In 1960, international trade was valued at $100 billion per
year. By 2008, it was $10 trillion.

International trade utilizes a broad range of units of
commerce:
◦
◦
◦
◦
◦
◦

Physical products
Services
Capital
Technology
Know-how
Labor
International trade became important as a result of the
globalization of markets
◦ Economic forces result in the direction of resources to the markets
where they are most highly valued and most efficiently consumed
The Scoop on International Business

International business activities can take one or more
of several forms.
◦
◦
◦
◦

Exporting
Importing
Global sourcing
International investment
 Portfolio investment
 Foreign direct investment (FDI)
All of these businesses involve some level of risk
◦ Cross cultural risk – Any error puts human value at stake
◦ Country risk – political, legal, or economic changes affect
the profitability of transactions or company survival
◦ Currency risk – fluctuations in monetary value (exchange
worth) affects the profitability of transactions
◦ Commercial risk – poor execution of strategies or tactics
affect the profitability of transactions or company survival
Key International Business Concepts

Participants in international business
◦ Multinational enterprises (MNE)
 Operate through affiliates and subsidiaries in multiple companies, usually
developed through DFI or acquisition/merger activities
◦ Small and medium enterprises (SME)
 Companies with fewer than 500 employees that generally engage in
international commerce through import and export activities
◦ Born global firm
 Entrepreneurial firms that expand rapidly into foreign markets

Internationalization drivers
◦
◦
◦
◦
◦
◦
Growth through diversification
Seek greater profits
Find new products or business ideas or methods
Better service global customers
Closer access to supply and suppliers
Attain lower cost factors of production
 Land, capital, technology, and labor
◦ Attain greater economies of scale
◦ Confront international competition
◦ Establish relationships with foreign partners
Who Are the Players and Why are They Here?
Millions have joined the world economy .... as
producers
 Cheap labor draws investment/production away
from industrial nations
 Markets are overcrowded with goods
 Exports from developing nations are rapidly
growing
 Downsizing continues

◦ Boost productivity
◦ Cut costs
 cost cutting is (can be) a powerful survival tool
 cost cutting IS NOT a growth strategy

New products, new ideas, new technologies drive
sales and revenues
International Business Developments
Radical
View
Pragmatic
Nationalism
Free
Market
Politics and Foreign Direct Investment

Marxist view: MNE’s exploit less-developed
host countries
◦
◦
◦
◦

Extract profits
Give nothing of value in exchange
Instrument of domination, not development
Keep less-developed countries relatively backward
and dependent on capitalist nations for investment,
jobs, and technology
By the end of the 1980s radical view was in
retreat
◦ Collapse of communism
◦ Bad economic performance of countries that
embraced the radical view
◦ Strong economic performance of countries who
embraced capitalism rather than the radical view
The Radical View


FDI has benefits and costs
Allow FDI if benefits outweigh costs
◦ Block FDI that harms indigenous industry
◦ Court FDI that is in national interest
 Tax breaks
 Subsidies

Many of the most successful developing countries –
past and present – followed a pragmatic nationalistic
stance
◦
◦
◦
◦
Japan
South Korea
China
Economists note that Hong Kong, which followed the free
market approach, was even more successful
Pragmatic Nationalism

Four main benefits of FDI for a host country
◦
◦
◦
◦

Resource-transfer effect
Employment effect
Balance-of-Payments effect
Effect on competition and economic growth
In a free market view
◦ Many economists argue that the benefits of FDI so
outweigh the costs associated with pragmatic
nationalism that it is misguided
◦ The best policy would be for countries to forgo all
intervention in an MNE’s investment decisions
The Benefits of FDI to Host Countries
Can drive out local competitors or prevent
their development
 Profits brought home ‘hurt’ (debit) a
host’s capital account
 Parts imported for assembly hurt trade
balance
 Can affect sovereignty and national
defense

Costs of FDI to the Home Country
Nations specialize in goods and services
that they can produce most efficiently
 Resource transfers benefit and strengthen
the host country
 Positive changes in laws and growth of
bilateral agreements attest to strength of
free market view
 All countries impose some restrictions on
FDI

The Free Market View

Economic Freedom means that people are
free to trade with others, compete in
markets, buy what they want, earn a living in
a job they choose, keep what they earn, and
own things privately.

Creative Destruction
◦ An economy undergoes continuous change
– some industries fail, others are born
◦ Capitalism critically relies on entrepreneurship and
the profit and loss system to direct this process
◦ This process cannot be centrally planned or directed
effectively - it must be discovered within the
marketplace
Concepts of Economic Freedom

Countries with the highest levels of economic
freedom have the highest standard of living
-

trade policy
govt. intervention
capital flows
foreign investment
wage/price controls
regulation
-
taxation
monetary policy
banking policy
property rights
black market
Wealthy countries tend to reintroduce
economic restrictions over time
Freedom and Growth






Economic freedom is on the rise
Poverty is still with us
A majority of the world’s economies are not free
Some formerly Communist countries have policies that
have achieved some level of economic freedom
European Monetary Union; same standards for all members
Success of capitalism in promoting economic freedom






1.
2.
3.
4.
Most Free
Hong Kong
Singapore
New Zealand
Bahrain
Luxembourg
U.S.





Least Free
161. North Korea
160. Iraq
159. Libya
158. Somalia
157. Cuba
Economic Freedom
Per Capita
Income
= $1,800
Per Capita
Income
= $24,200
North Korea vs. South Korea
Map of Economic Freedom
Zimbabwe (in Africa)
Life in Zimbabwe (Africa)
Life in Zimbabwe (Africa)
Romania (in Europe)
Life in Romania (Europe)
Life in Romania (Europe)
Life in Romania (Europe)
Life in Romania (Europe)
Life in Romania (Europe)
Life in Romania (Europe)
Life in Romania (Europe)
Life in Romania (Europe)
Life in Romania (Europe)
India (in Asia)
Life in India
Life in India
Mexico (in North America)
Life in Mexico
Life in Mexico
Hong Kong (in Asia)
Life in Hong Kong
Life in Hong Kong
Life in Hong Kong
United States (in North America)
United States (in North America)