Transcript The Four Risks of International Business

Ain Shams University
Business Administration
Department
International Business
Strategy, Management and
the new Realities
Cavusgil . Knight . Riesenberger
Dr. Reham Elseidi
Semester Overview
• Lecture:
Saturday: 12:00 pm – 02:00 pm
Monday: 08:00 - 10:00 am.
Venue:
FLO.1, Building D, Elseidi Hall
 Office Hours: Tuesday 12:00–2:00 pm
 Office:
BB-203
Email:
[email protected]
Ain Shams University, Business
Administration Department
2
Dr. Reham Elseidi
Assessment
• Final Exam
15 Grades
• Mid-term examination
3 Grades
• In-Class Performance
Projects / Presentations/ Quiz 2 Grades
Attendance is mandatory. Students are expected
to be prepared for every class and will be
expected to participate in class discussions.
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Dr. Reham Elseidi
Course Outline
1.
2.
Introduction to International Business
Globalization of Markets and the Internationalization of the Firm
(ch.2+small part from ch.3)
3. The Cultural Environment of IB (ch.4)
4. Ethics and International Business(ch.5)
5. Political and legal Systems in National environments(ch.7)
6. Government Intervention in international Business (ch.8)
7. regional economic integration (ch.9)
8. Emerging Markets, Developing Economies and Advanced (ch.10)
9. Exporting and countertrade (ch.14)
10. Foreign Direct Investment and Collaborative Ventures(ch.15)
11. Licensing, Franchising, and other Contractual Strategies(ch.16)
12. Global Sourcing and Marketing in the Global Firm(ch.17 + small
part from ch.18)
Ain Shams University, Business
Administration Department
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Dr. Reham Elseidi
International Business: The New Realities
by
Cavusgil, Knight and Riesenberger
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Learning Objectives
1. What is international business?
2. What are the key concepts in international trade
and investment?
3. How does international business differ from
domestic business?
4. Who participates in international business?
5. Why do firms internationalize?
6. Why study international business?
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Knowledge Check
1) According to the United Nations Development Programme, This
country ranks the highest in terms of Human Development.
o Luxembourg
o Norway
o Peru
o Iceland
2) The Flag of this country is depicted by plain green
o Saudi Arabia
o Libya
o Nigeria
o Georgia
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Dr. Reham Elseidi
Knowledge Check Contn’t
3)
o
o
o
o
4)
o
o
o
o
5)
o
o
o
o
Which Countries are the main suppliers of the world’s bananes?
Ecuador, Costa Rica, Philippines and Colombia
India, Peru & Ecuador
India, Peru & Brazil
South Africa, Malaysia & India
The country has the highest birth rate
China
India
Niger
Mexico
With which of these countries does the US maintain diplomatic Relations?
Bhutan
Cuba
Iran
Vietnam
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Dr. Reham Elseidi
Knowledge Check Contn’t
• The World Bank is often seen as the lender of
last resort to nation-states whose economies
are in turmoil and currencies are losing value
against those of other nations.
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Exercise
• Examine your clothing, watches, cell phones, Iphones, I-pods and report where in the world
each item was manufactured?
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A Day in the Global Economy: Julie Valentine
In the Opening Vignette, while visiting a
shopping mall, Julie Valentine:
• Ate food from Argentina, Brazil,
Costa Rica, France, Italy, and Spain.
•
Used or shopped for various items,
including cars, clothing, and electronics,
from China, Finland, France, Indonesia,
Germany, Hungary, Japan, Malaysia,
Mexico, the Netherlands, South Africa, South Korea,
Taiwan, and several other countries.
•
Like you, Julie’s life is touched every day, in various
ways, by international business.
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The Nature of International Business
• All value-adding activities—including sourcing,
manufacturing, and marketing—can be
performed in international locations.
• International trade can involve products,
services, capital, technology, know-how, and
labor.
• Firms internationalize through various entry
strategies, such as exporting and foreign direct
investment.
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International Business – A Firm Level Activity
• Performance of trade and investment activities by firms
across national borders.
• Academics and researchers also refer to IB as crossborder business.
• IB has gained much speed and complexity over the
past two decades.
• IB gives you access to products and services from
around the world and profoundly affects your quality of
life and economic well-being
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Dr. Reham Elseidi
Key Concepts in International Business
• Globalization of markets (a Macro Concept) :
Ongoing economic integration and growing
interdependency of countries worldwide.
• Integration is central to globalization, which
has resulted in the widespread diffusion of
products, technology, and knowledge
worldwide, regardless of where they originate.
• refers to the merging of historically distinct
and separate national markets into one huge
global marketplace.
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Dimensions of Market Globalization
15
• Greater integration and interdependency of
national economies; leading to freer movement
of goods, services, capital, and knowledge
• Rise of regional economic integration blocs
• Growth of global investment and financial flows
• Convergence of consumer lifestyles and
preferences
• Globalization of production
Ain Shams University, Business Administration Department
Dr. Reham Elseidi
Globalization of Production
• refers to the sourcing of goods and services from
locations around the globe to take advantage of
national differences in the cost and quality of
factors of production (such as labor, energy,
land, and capital).
• Companies can
– lower their overall cost structure
– improve the quality or functionality of their product
offering
– EX: Boeing 777&787, healthcare can be outsourced
today! Hospitals now routinely send X-rays via the
Internet to be read in India
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Key Concepts (cont.)
• International trade and investment are the
most conventional forms of international
business transactions.
• Trade = goods and services cross national
borders.
• Cross-border investment= the firm itself
crosses borders.
International Business: The New Realities
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Key Concepts (cont.)
• International trade: Exchange of products
and services across national borders,
typically through exporting and importing.
International Business: The New Realities
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Key Concepts (cont.)
• Exporting: Sale of products or services from a
base in the home country or a third country to
customers located abroad. Boeing and Airbus
export billions of dollars in commercial aircraft
products every year.
• Importing or Global Sourcing: Procurement of
products or services from suppliers located
abroad for consumption in the home country or
a third country. Toyota imports many parts from
China when it manufactures cars in Japan.
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Key Concepts (cont.)
International investment
Transfer of assets to another country or the
acquisition of assets in that country.
• International Portfolio investment (typically
short-term) is the passive ownership of foreign
securities such as stocks and bonds for the purpose
of generating financial returns.
• Foreign direct investment (FDI) (typically longterm) is an internationalization strategy in which
the firm establishes a physical presence abroad
through acquisition of productive assets such as
capital, technology, labor, land, plant, and
equipment. (Bank of Alexandria)
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Dr. Reham Elseidi
The “Flows” of International Business
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The Nature of International Trade
• Macro-International Trade: Aggregate export and
import flows of products and services between
nations.
• Micro-International Business: Cross-border
transactions of an individual business enterprise.
• Gross domestic product (GDP) is the total value
of products and services produced in a country
during a year.
• World exports grew more than thirty-fold during
the last few decades, while world GDP grew more
than tenfold.
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Dr. Reham Elseidi
World Trade Is Growing Faster than GDP
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World Trade Is Growing Faster than GDP
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World Trade Is Growing Faster than GDP
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World Trade Is Growing Faster than GDP
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World Trade Is Growing Faster than
GDP
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• The exponential growth of cross-border
trade relative to world GDP is due in part
to advanced economies such as Canada
and Japan sourcing to low-cost locations,
e.g. China and Mexico.
• The rapid integration of world economies
is fueled by factors such as the decline of
trade barriers, e.g. tariffs, liberalization of
markets, privatization and the economic
vitality of emerging markets.
Ain Shams University, Business Administration Department
Dr. Reham Elseidi
Leading Countries in International
Merchandise Trade, by Total Annual Value
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Leading Countries in International
Merchandise Trade, Total Value as a % of GDP
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FDI and Competitive Advantage
Large, resourceful companies with substantial international
operations are able to leverage FDI to:
1) Manufacture/assemble products in low-cost labor countries,
i.e. India, Russia, Brazil, China, and Mexico(many European
&U.S. firms);
2) Invest in western markets, even though they may originate
from emerging economies themselves:
• ■ Examples– India's Mittal Steel Co. acquired the Belgium-based Arcelor
SA in August 2006, creating a $38 billion conglomerate -- the
world's largest steel company.
– Russian oil and gas firm Lukos established thousands
of service stations in the U.S. and Europe.
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Dr. Reham Elseidi
Dramatic Growth of FDI Since the
1980s
• September 11, 2001 interrupted FDI inflows with the worldwide
panic that ensued following the terrorist attacks in the United
States.
• Developed economies = Australia, Canada, Japan, the United
States, and most countries in Western Europe.
• Developing economies = Parts of Africa, Asia, and Latin America.
Of particular significance is the growth of FDI into developing
economies despite widespread poverty and less investment
capital than advanced economies.
• The improved lives of billions are directly linked to world trade
and investment.
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Dr. Reham Elseidi
Foreign Direct Investment (FDI) Inflows into World
Regions (in Billions of U.S. Dollars per Year)
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Services as Well as Products
• Key international players: Tangible merchandise (products)
and intangibles (services- e.g. banks, consulting firms, hotels,
airlines, construction companies, retailers, etc.).
• ■ International trade in services accounts for about one
quarter of all global trade and is growing faster than products,
however the value of merchandise trade is still much greater
than the value of services trade.
• ■ Challenges unique to services:
•
◘ Not all services can be exported.
•
◘ Physical presence in host country is a prerequisite for
many services.
• ■ $2 trillion worth of services are sold abroad every year
International Business: The New Realities
33
Service Industries that
are Rapidly Internationalizing
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International and
Domestic Business: How They Differ
1. International business:
• is conducted across national borders;
• uses distinctive business methods;
• is in contact with countries that differ in terms of
culture, language, political system, legal
system, economic situation, infrastructure,
and other factors.
2. When they venture abroad, firms encounter four
major types of risk.
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The Four Risks of International Business
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The Four Risks of International Business
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FourRisks
Risks of International
TheThe
Four
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Business
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The
TheFour
FourRisks
Risksof
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InternationalBusiness
Business
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The Four Types of Risks in IB
• Cross-cultural risk: a situation or event where a
cultural miscommunication puts some human
value at stake
• Country risk or political: potentially adverse
effects on company operations and profitability
caused by developments in the political, legal,
and economic environment in a foreign country
• Currency risk or financial: risk of adverse
unexpected fluctuations in exchange rates. The
value of one currency in terms of another
• Commercial risk: firms potential loss or failure
from poorly developed or executed business
strategies, tactics, or procedures
Ain Shams University, Business Administration Department
Dr. Reham Elseidi
Cross-Cultural Risk
• Cultural differences: Risks arise from differences
in language, lifestyle, attitudes, customs, and
religion, where a cultural miscommunication
jeopardizes a culturally valued mindset or behavior.
• Negotiation patterns: Negotiations are required in
many types of business transactions; e.g.,
Mexicans are friendly and
emphasize social relations,
whereas Americans are
assertive and get down to
business quickly.
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Cross-Cultural Risk (cont.)
• Decision-making styles: Managers constantly
make decisions about the operations and future
direction of the firm. For example, Japanese take
considerable time to make important decisions,
whereas Canadians tend to be decisive and “shoot
from the hip.”
• Ethical practices: Standards of right and wrong
vary considerably around the world. For example,
bribery is relatively acceptable in some countries in
Africa, but is generally unacceptable in Sweden.
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Country Risk (Political Risk)
•
•
•
•
•
•
Government intervention, protectionism, and barriers to
trade and investment
Bureaucracy, red tape, administrative delays, corruption
Lack of legal safeguards for intellectual property rights
Legislation unfavorable
Examples
to foreign firms
- The U.S. imposes high tariffs on imports
of sugar and other agricultural products.
Economic failures
- Doing business in Russia often requires
paying bribes to government officials.
and mismanagement
- Venezuela’s government has interfered
Social and political
much with the operations of foreign firms.
- Argentina has suffered high inflation and
unrest and instability
other economic turmoil.
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Currency Risk (Financial Risk)
•
•
•
•
Currency exposure: General risk of unfavorable
exchange rate fluctuations.
Asset valuation: Risk that exchange rate fluctuations will
adversely affect the value of the firm’s assets and liabilities.
Foreign taxation: Income, sales, and other taxes vary
widely worldwide, with
Examples
implications for company
– The Indian rupee has fluctuated
performance and profitability.
a lot since 1990.
Inflation: High inflation,
– The U.S. has relatively high
common in many countries,
corporate income taxes.
complicates business
– Brazil and Russia have
planning and the pricing
experienced very high inflation.
of inputs and finished goods.
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Commercial Risk
•
•
•
•
•
Weak partner
Operational problems
Timing of entry
Competitive intensity
Poor execution of
strategy
General commercial risks such as these lead to
sub-optimal formulation and implementation of the
firm’s international value-chain activities.
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The Four Risks of IB: Conclusion
• These risks are always present, but manageable.
• Managers need to understand, anticipate, and
take proactive action to reduce their effects.
• Some risks are extremely challenging.
Example
The recent global financial crisis generated many
commercial, currency, and country risks, affecting banks
and other firms worldwide, and leading to steep declines
in national stock markets and normal business activity.
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Who Participates in International
Business?
(MNE or • Multinational Enterprise
or
Corporation
MNC)
SME
BGF
NGOs
• Small and Medium –
sized Enterprise
• Born Global Firm
• Non-governmental
Organizations
47
Multinational Enterprise, Corporation or Trans national Cooperation (MNE, MNC or TNC)
48
• A large company with substantial resources that
performs various business activities through a network of
subsidiaries and affiliates located in multiple countries.
• In addition to a home office, an MNE owns a worldwide
network of subsidiaries.
• Examples- Caterpillar, Kodak, Nokia, Samsung, Unilever,
Citibank, Vodafone, Carrefour, Bechtel, Four Seasons
Hotels, Disney, DHL, & Nippon Life Insurance.
• The most well known MNEs are ranked, based on
international sales revenue, in annual listings such as
Fortune magazine’s Global 500.
Ain Shams University, Business Administration Department
Dr. Reham Elseidi
Examples of Fortune’s Global 500
 Wal-Mart
 Exxon Mobil
 Royal Dutch Shell
 BP
 Total
Ain Shams University, Business Administration Department
 General Motors
 Toyota
 Ford
 Renault-Nissan
 Conoco Philips
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Dr. Reham Elseidi
Geographic Location of Multinational Enterprises, 2006
50
Small and Medium-Sized Enterprise
51
A company with 500 or fewer employees in the United States,
although this number may need to be adjusted downward for
other countries.
• Small firms comprise 90 - 95 percent of all firms in most
economies.
• Increasingly more SMEs participate in exporting, licensing,
and global sourcing.
• Small firms are the drivers for innovation.
• Account for one-third of exports from Asia; a quarter of the
exports from the affluent countries in Europe and North
America
• Contribute more than 50 percent of total national exports in
Italy, South Korea, and China.
Ain Shams University, Business Administration Department
Dr. Reham Elseidi
Born Global Firm
52
Born global firm: a young entrepreneurial company that
initiates international business activity very early in its
evolution, moving rapidly into foreign markets.
SMEs:
• Are often more innovative, adaptable, and have quicker
response.
• Are better able to serve niche markets.
• Can better leverage the Internet.
• Due to limited resources, tend to minimize fixed costs and
outsource.
• Tend to flourish on private knowledge that they cultivate
through their knowledge networks and international social
capital.
Ain Shams University, Business Administration Department
Dr. Reham Elseidi
Non-governmental Organizations (NGOs)
53
• They serve special causes, the arts, education,
politics, religion and research.
• Examples:
 Bill and Melinda Gates Foundation
 CARE- dedicated to reducing poverty
 British Wellcome Trust- supports health and
education
Ain Shams University, Business Administration Department
Dr. Reham Elseidi
Geographic Locations of the
500 Largest Multinational Enterprises
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Non-governmental Organizations
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Why do Firms Participate in IB?
• To seek opportunities for growth through
market diversification
•
E.g., Harley-Davidson, Sony, Whirlpool.
• To earn higher margins and profits
•
Often, foreign markets are more profitable.
• To gain new ideas about products, services,
and business methods
•
E.g., GM refined its knowledge about making small,
fuel-efficient cars in Europe.
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Why do Firms Participate in IB? (cont.)
• To better serve key customers that have
relocated abroad
• E.g., when Toyota launched its operations in Britain,
many of its suppliers followed suit.
• To be closer to supply sources, benefit from
global sourcing advantages, or gain
flexibility in the sourcing of products
• E.g., Dell sources parts and components from the
best suppliers worldwide.
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Why do Firms Participate in IB? (cont.)
• To gain access to lower-cost or better-value
factors of production
•
E.g., Sony does much of its manufacturing in China.
• To develop economies of scale in sourcing,
production, marketing, and R&D
•
E.g., Boeing lowers its overall costs by sourcing,
manufacturing, and selling aircraft worldwide.
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Why do Firms Participate in IB? (cont.)
• To confront international competitors more
effectively or to thwart the growth of
competition in the home market
•
Chinese appliance maker Haier established operations in
the United States, partly to gain competitive knowledge
about Whirlpool, its chief US rival.
• To invest in a potentially rewarding relationship
with a foreign partner
•
French computer firm Groupe Bull partnered with
Toshiba in Japan to gain insights for developing
information technology.
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Why Should You Study IB?
 To facilitate the global economy and
interconnectedness. IB brings nations closer
together.
 To contribute to national economic wellbeing. IB fuels economic growth and rising
living standards.
 To provide a competitive advantage for the
firm. IB provides companies with many
benefits, leading to profitability and competitive
advantages.
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Why Should You Study IB? (cont.)
 To gain a competitive advantage for yourself.
Working internationally offers a range of
enlightening experiences, new knowledge, and
other benefits that enhance careers…and it’s
exciting!
 To provide an opportunity for global
corporate citizenship. Firms must be ethical
and socially responsible in their dealings
because IB affects numerous constituents, often
in unintended ways.
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Recent Grad in IB: Ashley Lumb
•
•
•
•
Ashley is a real person, who got her undergraduate
degree from a state university a few years ago. Read
her profile in Chapter 1.
Ashley’s majors: Marketing and International business
Reasons for pursuing career in international business:
Adventure, perspective, career growth, and
the opportunity to learn foreign languages
Ashley’s jobs since college:
–
–
–
–
Marketing Representative in Nice, France
Account Representative in Monte Carlo
Marketing Associate in Rome, Italy
Marketing Manager at Italian Vogue magazine
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Recent Grad in IB: Ashley Lumb (cont.)
Ashley’s Success Factors
• Hard work and networking.
• Ashley made a strong effort to meet lots of people. She sent
out many resumes, asked a lot of questions, and researched
job markets that interested her.
• To keep afloat between assignments, she worked several
“unglamorous” jobs.
Challenges
• Working abroad means stepping outside your comfort zone.
• IB may require following a career path that is nontraditional or
not clearly defined .
• Language and culture barriers are always present.
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