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Summaiy Inteinational Business

Bi. van Boof

20092010




2

Inhoudsopgave
Chapter 1: What is international business? ...................................................................................................... 3
Chapter 2: Globalization of markets and the internationalization of the Firm ................................................. 7
Chapter 3: Organizational Participants that make International Business happen ........................................ 16
Chapter 4: Theories of international Trade and Investment ........................................................................... 24
Chapter 5: the cultural environment of international business ...................................................................... 34
Chapter 6: Political and Legal systems in national environments ................................................................... 42
Chapter 7: Government Intervention in International Business ..................................................................... 53
Chapter 8: Regional Economic Integration ...................................................................................................... 60
Chapter 9: Understanding emerging markets ................................................................................................. 69
Chapter 10: The international Monetary and Financial environment ............................................................ 79
Chapter 11: Global Strategy and Organization ................................................................................................ 87
Chapter 12: Global Market Opportunity assessment...................................................................................... 93
Chapter 13: Exporting and Countertrade ........................................................................................................ 97
Chapter 14: Foreign Direct Investment and Collaborative Ventures ............................................................ 104
Chapter 15: Licensing, Franchising and other Contractual strategies ........................................................... 107
Chapter 16: Global Sourcing .......................................................................................................................... 112
Chapter 17: Marketing in the global firm ...................................................................................................... 115
Chapter 18: Human Resource Management in the firm ............................................................................... 120



















3

Chapter 1: What is international business?

Ici Paris XL => chinese (HongKong)

1. What is international business ?

International business refers to the trade and investment activities by companies across national
borders. => cross border business
Firms seek for international market opportunities
They must have value adding activities otherwise you are out of business
The subjects of crossborder trade can be products, services, capital, technology, know how and labor
Firms internationalize through exporting, foreign direct investment, franchising, licensing, joint ventures
Exchange of goods and services around the world is typically made through exporting and importing
Globaliziation of markets refers to ongoing economic integration and growing interdependency of
countries worldwide
Leads to free movement of capital, labour, knowhow and goods and services
Globalization of markets has several trends:
1. Unprecedented growth of international trade
2. Trade between nations is accompanied by substantial flows of capital, technology and
knowledge
3. Development of highly sophisticated global financial systems and mechanisms that facilitate
cross border flow of products, money, technology and knowledge
4. Brought a greater degree of collaboration among nations through multilateral regulatory
agencies such as IMF and WTO
Going international for a firm has become easier than ever before

2. What are the key concepts in international trade and investment ?

International trade refers to crossborder exchange of products (merchandise) and services (intangibles)
typically through exporting and importing
Exporting is the sale of products/services to customers located abroad.
Importing (global sourcing) is the procurement of products/services from foreign suppliers for
consumption at home.
Exporting and importing may include both intermediate (raw materials and components) and finished
products.
International investment refers to the transfer of assets to another country or the acquisition of assets in
another country. These assets include capital, technology, managerial talent and manufacturing
infrastructure => factors of production
There are 2 types of cross border investment:
o International portfolio investment (typically shortterm) is the passive ownership of foreign
securities such as stocks and bonds for the purpose of generating financial returns.
o 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.
The natuie of inteinational tiaue
GDP is the total value of products and services in a country over the course of a year
Privatization is giving back state property to private actors

The natuie of inteinational investment
Firms undertake FDI for a variety of strategic reasons:
4

o To set up manufacturing or assembly operations
o To open a sales or representative office or other facility to conduct marketing or distribution
activities
o To establish regional headquarters
For example: Mital&Arcelor= steel firm, Lukos= Russian oil and gas firm
Large, resourceful companies with substantial international operations are able to leverage FDI to:
o Manufacture/assemble products in lowcost labor countries, i.e. India, Russia, Brazil, China, and
Mexico;
o Invest in western markets, even though they may originate from emerging economies
themselves
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.
See figure 1.3 p 8

Seivices as well as piouucts
International trade in services accounts for about one quarter of all global trade and is growing faster than
products, however the absolute value of merchandise trade is still much greater than the value of services trade.
Challenges unique to services:
o Not all services can be exported.
o Physical presence in host country is a prerequisite for many services.
The inteinational financial seivices sectoi
Banking and financial services are the most active crossborder services.
Explosive growth of global capital markets is attributed to:
(1) Money internationally into portfolio investments and pension funds
(2) Banks/financial institutions internationalization increased amount of cheap, local investment
capital, stimulating local financial markets and encouraging savings.
Barter trade (ruilhandel) comes back by monetary problems
Figure 1.5 p 10 ( Turkish are well known for construction )

3. How does international business differ from domestic business ?
The four risks in internationalization
Internationalizing firms are routinely exposed to 4 major types of risk: crosscultural risk, country risk/political
risk, commercial risk and currency risk. => take a look at figure 1.6 p 11

Crosscultural risk
= a situation or event where a cultural miscommunication puts human value at stake
Differences in language, lifestyles, attitudes, customs, and religion, where a cultural miscommunication
jeopardizes a culturallyvalued mindset or behavior.
Cultural blunders hinder the effectiveness of foreign managers.
Language critical dimension of culture a window to peoples values
Language differences impede effective communication.
Cultural differences may lead to suboptimal business strategies.

Eskimo => various words for snow
Aztecs same word for ice, cold, snow
Chapter 5

Country risk/political
5

= potentially adverse effects on company operations and profitability caused by developments in the political,
legal and economic environment in foreign countries.
Differences in host country political, legal and economic regimes may adversely impact firm profitability.
Also, laws, regulations and indigenous factors e.g. property rights, intellectualproperty protection, product
liability, taxation policies, inflation, national debt, and unbalanced international trade, may encumber firm
operations and performance.
Government intervention: restricts market access; imposes bureaucratic procedures hindering business
transactions; and limits the amount of earned income that firms may repatriate from foreign operations.
Economic freedom differs among nations Hong Kong, Singapore and Ireland are known as having the highest
levels of economic freedom, see: (http://www.heritage.org).

Currency risk
= the risk of adverse fluctuations in exchange rates
Risk of adverse exchange rate fluctuations, inflation and other harmful economic conditions create uncertainty
of returns.

Commercial risk
= firms potential loss or failure from poorly developed or executed business strategies, tactics or procedures

4. Who participates in International business ?
Focal firms are those companies that directly initiate and implement international business activity.
There are 2 types of focal firms:
Multinational enterprise (MNE)
Mediumsized enterprise (SME)
Multinational enterprises are the most important type of focal firm; add value in multiple countries,
through a network of subsidiaries, leveraging manufacturing, R&D, procurement, and marketing
activities, to yield the most economic sense.
Belgium has 4 multinationals: InBev, Solvay, Bekaert and Delhaize Group
Examples Caterpillar, Kodak, Nokia, Samsung, Unilever, Citibank, Vodafone, Carrefour, Bechtel, Four
Seasons Hotels, Disney, DHL, & Nippon Life Insurance.
The largest MNEs are found in the oil industry (Exxon Mobile, Shell, ), automative sector(GM, Toyota,
Ford, ) and retailing(Walmart)
Examples of Fortunes Global 500 Exxon Mobil, Royal Dutch Shell, BP, General Motors, DaimlerChrysler,
Toyota, Ford, and WalMart.
SMEs have limited managerial and other resources => are the drivers of innovation
SME is a company with 500 or fewer employees.
Small firms comprise 90 95 percent of all firms in most economies.
Small firms:
o Are the drivers for innovation.
o Account for onethird of exports from Asia; a quarter of the exports from the affluent countries
in Europe and North America
o Contribute more than 50 percent of total national exports in Italy, South Korea, and China.
One type of contemporary international SME is the born global firm = young entrepreneurial company
that initiates international business activity very early in its evolution, moving rapidly into foreign
markets
o Example: DLP, medical products for heart surgery
SME Strategies for success:
(1) SMEs are often more innovative, adaptable, and have quicker.
(2) SMEs are better able to serve niche markets.
(3) Smaller firms can better leverage the Internet.
(4) Due to limited resources, SMEs tend to minimize fixed costs and outsource.
(5) Smaller firms tend to flourish on private knowledge that they cultivate through their knowledge networks
and international social capital.

6

Global Trend:
DIESEL S.p.A.: A Smaller Firms Smashing Success in International Markets
This global trend profiles Diesel, an SME based in Italy. With annual sales of more than US$1 billion, some 3,000
employees, distribution to over 80 countries, 1,500 new designs every 6 months and a firstmover in launching
an Internet presence, Diesel's fashions are a gas. Their international success has been propelled with some
controversial advertising. Diesel represents a classic success story of a smaller firm in the international business
arena.

Nongovernmental organizations(NGOs)
Nonprofit international organizations include nongovernmental organizations (NGOs) and charitable groups.
They serve special causes, the arts, education, politics, religion and research.
Examples: (Nonprofit Organizations)
Bill and Melinda Gates Foundation
CARE dedicated to reducing poverty
British Wellcome Trust supports health and education
GlaxoSmithKline (GSK)
Canada, Czech Republic, France, Italy, Romania, Spain & U.S
BarretstownIreland and LEnvol (France) for seriouslyill children
Slovakian children promotes healthy eating/exercise
Spain healthcare for homeless children
Russia Children with disabilities
Ethiopia reduction of preventable childrens diseases
Vietnam birthing support
Other examples: Fair Trade, Oxfam
5. Why do firms pursue internationalization strategies ?
Some motives are strategic others are reactive.
Example of strategic: tap foreign market opportunities or acquire new knowledge
Example of reactive: need to serve a key customer who has expanded abroad

There are 9 specific motivations to expand abroad:

1. Seek growth opportunities through market diversification.
2. Earn higher margins and profits.
3. Gain new ideas about products, services, and business methods.
4. Better serve key customers who have relocated abroad.
5. Locate closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of
products.
6. Get access to lowercost or bettervalue factors of production.
7. Develop economies of scale in production, marketing, and other activities.
8. Confront global competitors effectively or thwart the growth of competition in the home market.
9. Invest in a potentially rewarding relationship with a foreign partner

6. Why should you study international business ?
Facilitatoi of the global economy anu inteiconnecteuness
GATT(General Agreement on Tariffs and Trade) growth in international trade and investment
Emerging markets => new impetus to worldwide economic interconnectedness
Advances in technology, has also served to transform the global economy

Contiibutoi to national economic well-being
International trade is a critical engine for job creation
7

There is a strong relationship between a nations level of prosperity and its participation in crossborder
trade and investment
International trade and investment can also help reduce poor economic conditions in developing
economies
European Union raise living standards and is making international trade and investment much easier for
European businesses
NAFTA the same (North American Free Trade Agreement)

An oppoitunity foi ulobal Coipoiate Citizenship
Internationalizing firms are always under public scrutiny. Their actions are closely monitored and held to
local ethical standards
o Examples: Coca Cola Company, Mc Donalds and Citibank
Firms are proactively developing socially responsible policies and practices. => example Starbucks
Starbucks will only sell coffee from Rain Forest Alliance certified growers.
Philips, Unilever, and WalMart have signed on for sustainable development practices.
McDonalds will sell organic milk and purchase beef from farmers certified for animal welfare and
environmental standards.

Requirements for managers going internationals:
Openmindedness
Tolerance for ambiguity
Perceptiveness
Premium on personal relationships
Flexibility, adaptability, selfreliance
Good sense of humor
Warmth in human relationships
A curious mind

Recent Grad in IB: Ashley Lumb
International Marketing Specialist
Ashleys international experience was an impressive asset to prospective employers in the U.S.
Success factors in working abroad were hard work and networking.

CASE 1: WHIRLPOOL


Chapter 2: Globalization of markets and the internationalization of the Firm
The value chain is central in this chapter!

Bangalore: The New Silicon Valley
The globalization of business and the integration of functions across the value chain and across countries is
illustrated by companies such as Accenture, AOL, Intel, Cisco, Oracle, Philips, and Ernst & Young which have
relocated their customer service centers, software development, chip design, computer systems maintenance,
Xray diagnosis, mortgage processing, tax form preparation, and lost luggage tracking to Bangalore, Delhi,
Chennai, Hyderabad, and other emerging hightech centers across India.

Uniqueness of the situation described
The advantages of sourcing to India are unique:
(1) India is home to several million highly educated knowledge workers.
(2) English is widely spoken.
(3) Indians are paid onefifth or onequarter of what Westerners expect for similar work, and in many
cases they do it better.
(4) India is located on the other side of the world from Europe and the U.S., allowing Indians to take
advantage of timesharing.
8

Example: Infosys => leading software firm in India

Two mega trends are underscored that have altered the international business landscape: the
globalization of markets or economies and technological advances.
Market globalization is a broad term referring to the interconnectedness of national economies and the
growing interdependence of buyers, producers, suppliers, and governments in different countries.
Globalization allows firms to view the world as one large marketplace for goods, services, capital, labor,
and knowledge.
Globalization of markets refers to the economic integration and growing interdependency of national
economies.
Example: Neogen => diagnostic kits to test for food safety; were able to internationalize quickly and
acquired a worldclientele
1. Why globalization is Not a New Phenomenon

Advanced technologies such as Internet and modern transportation systems, have accelerated the pace of
globalization
Phases of Globalization
Exhibit 2.1 p 32 summarizes the Phases of Globalization. Since the 1800s, in the evolution of market
globalization has witnessed four distinct phases, each triggered by global events and technological discoveries:

The First phase of globalization
1830 1880.

International commerce became widespread in this period due to the growth of railroads, efficient
ocean transport, and the rise of large manufacturing and trading companies. + The inventions of the
telegraph and telephone in the 1800s facilitated information flows between and within nations and
greatly aided early efforts to manage companies supply chains.

The Second phase of globalization
1900 1930

was caused by the rise of electricity and steel production. The phase reached its height just before the
Great Depression, a worldwide economic downturn that started in 1929.
Western Europe was the most industrialized region + its colonization of countries worldwide led to
establishment of the earliest subsidiaries of multinational firms.
=> European companies such as BASF, British Petroleum, Nestl, Shell, and Siemens had established foreign
manufacturing plants by 1900. The Italian manufacturer Fiat supplied vehicles to nations on both sides of the
war.

The Third phase of globalization
1948 1970s

followed World War II. => At wars end demand existed for consumer products, as well as for input
goods to rebuild Europe and Japan.
the U.S. was least harmed by the war and became the worlds dominant economy.
Substantial government aid helped stimulate economic activity in Europe.
Commonplace were high tariffs, other trade barriers, with strict controls on currency and capital
movements. => Australia, the United States and the United Kingdom systematically sought to reduce
international trade barriers.
=>The result of this effort was the General Agreement on Tariffs and Trade (GATT) the precursor to the World
Trade Organization (WTO).
GATT served as a global negotiating forum for liberalizing trade barriers, and annual meetings aimed at
reducing international trade and investment barriers.
9

Participating governments recognized that liberalized trade would stimulate industrialization,
modernization, and better living standards.
Eventually, many more nations joined the GATT, and their efforts led to the formation of the WTO. (149
members)
led to the formation of key international organizations such as the International Monetary Fund, the
World Bank, and the United Nations.
Firms like Unilever, Philips, Royal DutchShell, British Petroleum, and Bayer organized their businesses
by establishing independent subsidiaries in each of the foreign countries where they did business.
Numerous companies developed strong trade names, including Nestle, Kraft, John Deere,
Gradually, large firms began to seek cost advantages by locating factories in developing countries with
low labor costs.
With the easing of trade barriers and currency controls, capital began to flow freely across national
borders, leading to integration of global financial markets.

The Fourth and current phase of globalization
1980s Present

enormous growth in crossborder trade and investment activity. The following innovations caused this
phase:
o Commercialization of the personal computer.
o Arrival of the Internet and the web browser.
o Advances in communication and manufacturing technologies.
o Collapse of the Soviet Union and ensuing market liberalization in central and Eastern Europe.
o Substantial industrialization and modernization efforts of the East Asian economies including
China.
Growing global prosperity began to reach emerging markets such as Brazil, India and Mexico.
Huge increases in FDI, especially in capital and technologyintensive sectors. Geographically distant yet
electronically interconnected technological advances in information, communications, and
transportation made internationalization feasible.
Growing integration inspired mergers/acquisitions such as GM acquiring Saab in Sweden, Ford taking
over Mazda in Japan, and Daimler Benz acquiring Chrysler in the U.S.
Globalization and technological advances resulted in the death of distance. That is, a shrinking of
geographic and cultural distances that separate nations. (exhibit 2.2 p 34)

2. An organizing Framework for Market Globalization

Exhibit 2.3 p 35, presents an organizing framework for examining market globalization

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This model distinguishes between:
(1) the drivers or causes of globalization;
(2) the many dimensions or manifestations of globalization;
(3a) societal consequences of globalization; and
(3b) firmlevel consequences of globalization which compel firms to proactively internationalize.

The double arrows illustrate the interactive relationship between market globalization and its
consequences.
Example Vodafone implements a proactive global strategy by selling standardized products,
emphasizing standardized products and services, and pursuing standardized marketing programs
around the world. Proactive firms are more succesfull than reactive firms.
Universal demand is key to a global strategy as standardization and economies of scale are central to the
global efficiencies underlying the advantages of a global strategy.

3. Dimensions of market globalization

In the context of international business, market globalization may be viewed simultaneously as:
(a) Consequences of economic, technological, and government trends;
(b) Drivers of economic, political, and social phenomena; and
(c) Drivers and consequences of firmlevel internationalization.

Globalization of markets has 5 major dimensions:

1. Integration and interdependence of national economies.
Value chain activities= the sequence of value adding activities performed by the firm in the process of
developing, producing, marketing and servicing a product. => the aggregate activities => give rise to
economic integration
Governments contribute to this integration by:
11

(1) Gradually lowering trade and investment barriers;
(2) Increasingly harmonize their monetary and fiscal policies within regional economic integration blocs
(also known as trade blocs), e.g. EU
(3) devise and supervise supranational institutions such as IMF, WB, WTO

2. Rise of regional trading blocs and economic unions.
the emergence of regional integration through trade blocs and economic unions
Trade bloc: A freetrade area established by two or more countries through multiple tax, tariff, and
trade agreements, designed to reduce or eliminate barriers to crossborder trade and investment.
Examples: the North American Free Trade Agreement area (NAFTA), the Asia Pacific Economic
Cooperation zone (APEC), and Mercosur in Latin America.
Economic and Monetary Union: A single market with a common currency. This is characteristic of more
advanced stages of economic integration. Only Example: EU

3. Growth of global investment and financial flows.
Foreign direct investment (FDI) has grown dramatically due to global sourcing.
4. Convergence of consumer lifestyles and preferences.
Lifestyles and preferences are converging, i.e. increasingly standardized, resulting in global market
segments.
While converging tastes facilitate the marketing of standardized products/services to global consumers,
they also signal the loss of traditional lifestyles and values in individual countries.

5. Globalization of production.
Intense global competition has made economies of scale a critical key success factor. Global players are
forced to evaluate global sourcing to take advantage of national differences in the cost and quality of
factor inputs. => explains why offshoring to low laborcost locations such as China, Mexico, and Eastern
Europe is so popular.
The service sector is also global sourcing.
Examples: real estate giant RE/MAX has established more than 5,000 offices in over 50 countries. The
French firm Accor operates hundreds of hotels worldwide.
If you make something handmade, there is a difference
For example: Barco vs Sony
Barco is smaller, niche,speciality products Sony is big, mass production,economies of scale

4. Drivers of Market Globalization
There are 5 drivers notable :

1. Worldwide reduction of barriers to trade and investment.
National governments have sought to reduce trade and investment barriers, which has accelerated
global economic integration. => WTO has facilitated this
Extra: Joining the WTO in 2001, even China has committed to make its market more accessible to
foreign companies.
Market opening is closely associated with the emergence of regional trade blocs, a key dimension of
market globalization.
It was the transition of command economies to marketdriven economies that facilitated their
membership into the global economy.
With privatization of previously stateowned industries, these countries have enjoyed greater economic
efficiency, simultaneously attracting foreign capital.

2. Market liberalization and adoption of free markets.
The Berlin Wall, built in 1961, separated the communist East Berlin from the democratic West Berlin. =>
The tearing down of the Berlin Wall in 1989, the collapse of the Soviet Unions economy that same year,
and Chinas freemarket reforms signaled the end of the 50year Cold War between communist regimes
and democracy.
12

It was the transition of command economies to marketdriven economies that facilitated their
membership into the global economy.
These events opened roughly onethird of the world to freer international trade and investment.
China, India, and Eastern Europe have become some of the most costeffective locations for producing
goods and services. => With privatization of previously stateowned industries, these countries have
enjoyed greater economic efficiency, simultaneously attracting foreign capital into their national
economies.

3. Industrialization, economic development, and modernization.
Industrialization transitions emerging markets Asia, Latin America, and Eastern Europe from being low
valueadding commodity producers, dependent on lowcost labor, to sophisticated competitive
producers and exporters of premium products (highervalue products) such as electronics, computers,
and aircraft.
Gross National Income (GNI) one of the most important measures of economic development, i.e. standards of
living & discretionary income (exhibit 2.4)
The adoption of modern technologies, improvement of living standards, higher discretionary income levels and
adoption of modern legal and banking practices increase the attractiveness of emerging markets as investment
targets and facilitate the spread of ideas, products, and services across the globe.

4. Integration of world financial markets.
Integration of world financial markets enables internationally active firms to raise capital, borrow funds,
and engage in foreign currency transactions wherever they go.
Crossborder transactions are made easier partly as a result of the ease with which funds can be
transferred between buyers and sellers through a network of international commercial banks.
The globalization of finance enables firms to pay suppliers and collect payments from customers
worldwide.

5. Advances in technology.
Technological advances in communications, information, manufacturing, and transportation have
served as a remarkable facilitator of crossborder trade and investment.
Advances in technology:
o facilitates the development and spread of new products and technologies;
o reduces the cost of doing business internationally;
o enables even smaller firms to go international
o helps coordinate worldwide activities;
o mitigates geographic distance by providing virtual interconnectedness with customers,
subsidiaries, intermediaries, and suppliers
5. Technological advances as a driver of market globalization

Technological advances have greatly eased the management of international operations. Firms now
interact more efficiently with foreign partners and valuechain members than ever before
Technological advances made the cost of international operations affordable for all types of firms
Technological advances has spurred the development of new products and services that appeal to global
audience => examples: PDAs, Playstation
China and India are the new beachheads of technological advances => Top management at Intel and
Motorola, two of the world's premier technology companies, agree that China is the future when it
comes to technological progress.
The most important activity underlying technological advances is innovation (surveys!)
Technological advances have had the greatest impact in several key areas: information technology,
communications, manufacturing and transportation
Exhibit 2.5 illustrates the plummeting cost of global communications and the growing number of
Internet users.
Innovation Societies and organizations innovate in various ways, including new product designs, new
production processes, new approaches to marketing, and new ways of organizing or training.
13


Infoimation Technology
The effect of Information Technology (IT) on business has been nothing short of revolutionary.
Smaller firms can leverage IT to design and produce customized products that can be targeted to narrow,
crossnational niches.
The impact of IT on our daily lives has been profound cell phones, Google, Yahoo, etc.
IT supports strategic decisions such as the selection of qualified foreign business partners based on sound
information and intelligence.

Communications
The most profound technological advances have occurred in communications, especially telecommunications,
satellites, optical fiber, wireless technology, and the Internet.
The Internet, and Internetdependent communications systems such as intranets, extranets, and email,
connects millions of people across the globe.
The dotcom boom led to massive investment in fiberoptic telecommunications cable.
Transmitting voices, data, and images is essentially costless
The Internet opens up the global marketplace to companies that would normally not have the resources to do
international business, including countless SMEs. It is stimulating economic development and a massive, global
migration of jobs, particularly in the services sector.

Nanufactuiing
Revolutionary developments now permit manufacturing that is both lowscale and low cost, with the support
of computeraideddesign of products (CAD), robotics, and production lines managed and monitored by
microprocessorbased controls.

Tianspoitation
The decision to export or manufacture abroad rests with the transportation costs of raw materials,
components, and finished products.
The plunging costs of computing, communications, and transportation have greatly reduced the costs of doing
business internationally, and successful firms continually search for new sources of competitiveness.

Global Trend: Globalization and EBusiness in the Online World
This Global Trend profiles how information technology and the Internet are transforming international business
by leveling the playing field for all types of firms. Bornglobal firms are among the most intensive users of the
Web for global selling, procurement, and customer service.
Ebusiness provides three types of competitive advantages:
o Productivity and cost reductions via integrated and coordinated worldwide valuechain
activities.
o Value creation through flexibility, focus, marketing and entrepreneurial initiatives.
o Improves knowledge and information flows.
Example Cisco uses ebusiness to minimize costs and maximize effectiveness via its global supply chain.

6. Societal consequences of Market Globalization

Positive consequences of market globalization: Crossborder trade and investment opened the world to
innovations and progress while increasing performance standards, currently known as global
benchmarking or world class.
Negative consequences of market globalization: The transition to an increasingly single, global
marketplace poses challenges to individuals, organizations and governments.
14

Poverty is especially notable in Africa, Brazil, China and India where lowerincome countries have not
been able to integrate with the global economy as rapidly as others.
Globalization has created countless new jobs and opportunities around the world, but it has also cost
many people their jobs.
How freeer the society, how higher the income ( Belgium isnt completely free, take a look at slide
distribution of economic freedom)
Globalization has produced some harmful consequences as well => low income countries are not able to
integrate with the global economy as rapidly as others
Loss of National Soveieignty

Sovereignty is the ability of a nation to govern its own affairs
Large market nationals can exert considerable influence on governments through lobbying or campaign
contributions, e.g. for the devaluation of the home currency which would give them greater price
competitiveness in export markets.
Still, even the largest firms are constrained by market forces.
Some argue that gradual integration of the global economy and increased global competition combined
with privatization of industries in various nations are making companies less powerful, for example
Ford, Chrysler, and General Motors once completely dominated the U.S. auto market. Today many
more firms compete in the U.S., including Toyota, Honda, Hyundai, Kia, Nissan, and BMW.
To minimize globalizations harm and reap its benefits, governments should strive for an open and
liberalized economic regime:
(1) Freedom to enter and compete in markets;
(2) Protection of persons and intellectual property;
(3) Rule of law;
(4) Voluntary exchange imposed by markets rather than through the political process.
Transparency of business and regulatory agencies is critical.

0ffshoiing anu the Flight of }obs

Offshoring is the relocation of manufacturing and other valuechain activities to costeffective
destinations abroad.
=> example: Ernst &Young, has much of its support work done by accountants in the Philippines.
Massachusetts General Hospital has its CT scans and Xrays interpreted by radiologists in India. Many IT
support services for customers in Germany are based in the Czech Republic and Romania.
Offshoring has resulted in job losses in many mature economies with relatively high wages
Multinationals were quick to relocate production to countries that offer better comparative advantages.
=> Example Electrolux, a Swedish manufacturer of home appliances, moved its Greenville, Michigan,
based refrigerator plant to Mexico in 2005. Electrolux had provided 2,700 jobs in this western Michigan
community of 8,000. Despite repeated appeals by the local community, the labor union, and the State
of Michigan that offered incentives to the company to stay Electrolux went with its decision to shift
manufacturing to Mexico.
Advantages of offshoring:
(1) Economies of scale by centralizing production locations;
(2) Lowcost labor advantages in certain countries; and
(3) Knowledgesharing from contracting with experienced suppliers.
Effect on the pooi
Exhibit 2.6 p 48 depicts the Growth of World GDP, 19972006. China, India and Turkey are the fastest
growing economies, registering annual GDP growth rates of 5% or more.
Multinationals are often critized for paying low wages, exploiting workers and employing child labor
Labor exploitation and sweatshop conditions are genuine concerns in many developing economies ;
however workconditions tend to improve over time => footwear industry in Vietnam
Most African countries continue to suffer low or negative GDP and alarming poverty
15

Developing countries can engage in a number of proactive measures in order to reduce poverty:
Improve conditions for investment and saving;
Seek market liberalization and promote increased trade and investment;
Build strong institutions and government to foster good governance; and
Invest in education and training to promote productivity.
In turn advanced economies can play a role in reducing poverty by:
Making their markets more accessible to lowincome countries
Facilitating the flows of direct investment, other private capital and technology into low inome
countries
Providing debt relief to heavily indebted poor countries.
Effect on the natuial enviionment

Globalization harms the environment by promoting increased manufacturing and other business activities that
result in pollution, habitat destruction, and deterioration of the ozone layer.
Example: China is attracting much inward FDI and stimulating the growth of numerous industries, which
results in new factories whose activities spoil previously pristine environments; also, growing industrial
demand for electricity led to construction of the Three Gorges Dam, which flooded agricultural lands,
displaced onemillion inhabitants and permanently altered the natural landscape in Eastern China.
Another example is Japan, endured polluted rivers and smoggy cities in the early decades of its
economic development following World War II. As Japans economy grew, the Japanese passed tough
environmental standards, aimed at restoring natural environments.
Evolving company values and concern for corporate reputations also lead most firms to reduce or eliminate
practices that harm the environment

Effect on the national cultuie

Globalization exerts strong pressures on national culture
Advertising leads to the emergence of societal value models on Western countries, globalization can
alter peoples norms, values and behaviors, which tend to homogenize over time
Information and communications technologies promote the homogenization of world cultures
As globalization standardizes superficial aspects of life across national cultures, people are resisting
these forces by insisting on their national identity and taking steps to protect it
Cultural imperialism is offset by the opposite trend of nationalism.
Governments try to block cultural imperialism and prevent the erosion of local traditions.
Global media have a pervasive effect on local culture, gradually shifting it toward a universal norm.

7. Firmlevel consequences of market globalization : internationalization of the Firms Value
Chain

Internationalization may take the form of global sourcing, exporting, or investment in key markets
abroad
The most direct implication of market globalization is on the firms value chain
Exhibit 2.8 p 52 illustrates a typical international firms value chain
16


Nike outsources everything => only responsible for design and distribution
CASE 2: Diverse Perspectives on Globalization of Markets


Chapter 3: Organizational Participants that make International Business happen

Born Global firms:

This vignette illustrates the increasingly important role that the small and mediumsized enterprises
(SMEs) play in the global arena.
At the request of the United Nations, Geo Search designed the worlds first land mine detector, called
Mine Eye, in 1997, and had an immediate international market because of millions of mines buried in
countries like Kuwait, Cambodia, Afghanistan, and Lebanon.
Geo Searchs electromagnetic radar can distinguish between mines and other objects buried
underground. Images appear in three dimensions on a liquid crystal display, and there is no need to
touch the ground surface.
Geo Search is one example of an increasing number of SMEs that are active in international business.
Globalization and technological advances have made internationalization more attainable and
affordable, such that there are many more small, global firms.
Born global firms internationalize (typically through exporting) at or near their founding, developing a
borderless corporate culture.
Reasons for early internationalization:
Management may perceive big demand for the firms products abroad.
Management may also have a strong international orientation, and press the firm into foreign markets.
Firms may specialize in a product for which there is inadequate domestic demand.
Example Neogen Corporation is a born global in the United States that manufactures chemicals that kill
harmful bacteria and toxins in food crops. The fact that certain toxins are more common in foreign
locations led Neogen to internationalize shortly after its founding.

1. Three types of participants in international business

International business is a complex undertaking and requires numerous organizations to work together as a
coordinated team

There are 3 major categories of participants:
17


1. A focal firm => takes center stage is the initiator of an international business transaction, including
MNEs and SMEs, that conceives, designs, and produces the product/service intended for consumption
by customers worldwide.
2. A distribution channel intermediary => is a specialist firm that provides a variety of logistics and
marketing services for focal firms as part of the international supply chain, both in the home country
and abroad.
o Intermediaries (independent businesses) such as distributors and sales representatives are
typically located in foreign markets and provide distribution and marketing services on behalf of
focal firms.
3. A facilitator => is a firm or an individual, with special expertise as legal advice, banking, and customs
clearance, or related support services that assists focal firms in the performance of international
business transactions.
o A freight forwarder is a specialized logistics service provider that arranges international
shipping on behalf of exporting firms, much like a travel agent for cargo. Facilitators are found
both at home and foreign markets.
While these three types of participants make up the international business landscape, keep in mind that
international business transactions take place within political, legal, and regulatory environments.
Supply side focal firms, intermediaries, and facilitators
Demand side customers or buyers (individual and organizational)
2. Participants organized by valuechain activity

The focal firms, intermediaries, and facilitators all are involved in one or more critical valueadding
activities such as procurement, manufacturing, marketing, transportation, distribution, and support
configured across several countries.
Exhibit 3.1 p 64 shows the stages in the value chain where channel intermediaries and facilitators
typically operate. It also identifies intermediaries and facilitators critical to the functioning of
international business transactions that we discuss in this chapter.

Import side export side



Upstream valuechain activities downstream valuechain activities

In highly internationalized focal firms, the value chain is configured in numerous countries and often
from multiple suppliers, locating each activity in a country with the most favorable combination of cost,
quality, logistical considerations, and other criteria.
18

Exhibit 3.2 p 65 illustrates the national and geographic diversity of suppliers that provide content for an
automobile, a truly global value chain.

An illustiation of an inteinational value chain: Bell Inc

Exhibit 3.3 illustrates the value chain for the production and marketing of Dell notebook computers. In reality,
Dell makes a variety of products, each with its own value chain. The total supply chain for a notebook computer,
including multiple tiers of suppliers, involves about 400 companies, primarily in Asia, but also 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 nonU.S. sales accounting for 40 percent.
Shipping is handled via air transport, e.g. from the Dell Malaysia factory to the United States, Dell charters a
China Airlines 747 that flies to Nashville, Tennessee six 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.

3. Focal firms in international business

The multinational enteipiise

A multinational enterprise (MNE) is a large company with substantial resources that performs various
business activities through a network of subsidiaries and affiliates located in multiple countries
Exhibit 3.4 p 67 highlights a sample of MNEs and illustrates the diverse industry sectors these focal firms
represent => which multinationals in which sector know some names!
In developing countries and centrally planned economies, some focal firms are partly or wholly owned
by the government
Focal firms in the services sector: Examples Citibank in banking, CIGNA in insurance, Bouygues in
construction, Accor in hospitality, Disney in entertainment, Nextel in telecommunications, and Best Buy
in retailing.
IKEA, WalMart, and Gap are considered focal firms, even though retailers are usually classified as
intermediaries. Also internet focal firms such as Amazon,
Small anu meuium-sizeu enteipiises

SME are typically small (500 employees or less), in Belgium it is less than 50 people
Because of their size and relative inexperience , SMEs often target specialized products to market
niches that MNEs consider too small to service
SME advantages:
Flexible, innovative, adaptable, and entrepreneurial
Less bureaucracy and fixed assets tied up in foreign markets.
Target specialized products to market niches.
Serve neglected global market segments with direct marketing access
SME disadvantages:
Limited financial and human resources.
To compensate for their limited resources, SMEs leverage the services of intermediaries
Boin global fiims

Born global firms such as the Geo Search Ltd. featured in the opening vignette represent a relatively
new breed of the international SME those that undertake early and substantial internationalization.
Examples
19

o History and Heraldry, a born global in England that specializes in gifts for history buffs and
those with English ancestry It recently opened a North American subsidiary in Florida. Indeed,
some successful born globals grow large enough to be considered an MNE.
o QualComm, founded in California in 1985, initially developed and launched the email software,
Eudora, the firm eventually grew to become a major MNE on the strength of substantial
international sales. Technological prowess and managerial vision were strong factors in making
the firm an early international success.
Born globals are typically avid users of the Internet and modern communications technologies, which
further facilitate early and efficient international operations.
The emergence of born globals is associated with international entrepreneurship, in which innovative,
smaller firms increasingly pursue business opportunities everywhere, regardless of national borders
How longer in the market, the bigger you become


4. Foreign Market Entry Strategies of Focal Firms

Both MNEs and SMEs rely on contractual relationships such as franchising and licensing

A fiamewoik foi classifying maiket entiy stiategies
20

Exhibit 3.5 p 70 shows the array of foreign market entry modes that focal firms use and the foreign
partners they seek EXAMEN!!!

First column is the nature of international transaction.
Trade of products buying or selling products
Services, i.e. intangibles buying or selling services
Equity ownership foreignbased enterprises
Second column identifies the types of focal firms
Manufacturing businesses (Ford, Sharp, and John Deere)
Trading companies are brokers of goods and services.
Service providers (insurance, theme parks, lawyers, teachers, and consulting firms)
Licensora firm that enters a contractual agreement with a foreign partner that allows the latter the right to
use certain intellectual property for a specified period of time in exchange for royalties or other compensation.
Franchisors sophisticated licensors that provide an entire business system (in exchange for fees, royalties, or
other forms of compensation) to a foreign franchisee, such as McDonalds and Hertz Car Rental.
Turnkey contractors focal firms or a consortium of firms that plan, finance, organize, manage, and implement
all phases of a project and then hand it over to a foreign customer after training local personnel.
examples: European Channel Tunnel, Three Gorges Dam in China, Hong Kong Airport
Buildown transfer: venture an increasingly popular type of turnkey contract in the developing
economies where contractors acquire an ownership in the facility for a period of time until it is turned
over to the client
Third column identifies the foreign market entry strategy, or the mode of internationalization.
Exporting, importing, licensing, or FDI
Agency relationships typical for intangibles (professional services, banks, advertising
agencies, and market research firms)
Licensing and franchising are common in the international transfer of intangibles.
21

FDI (focal firm) should a physical presence be maintained in the target market vs.
foreign intermediaries
Fourth column identifies the location of major activities home vs. abroad.
Fifth column identifies the nature of the foreign partner.
MNEs have seen a strong trend in recent years away from fully integrated operations
toward the delegation of certain noncore functions to outside vendors, i.e.
outsourcing.
MNEs and other large firms tend to carry out manufacturing, marketing, and sales
activities in multiple countries.

Focal fiims othei than the NNE anu SNE

Focal firms may enter into contractual relationships with foreign partners through licensing and franchising.
Licensing allows companies to internationalize rapidly while remaining in their home market.
Examples:
o AnheuserBusch signed a licensing agreement with the Japanese beer brewer Kirin under which
Kirin produces and distributes Budweiser beer in Japan. The agreement has substantial
potential given Japan's $30 billionayear beer market.
o Mega Bloks (Canadian toymaker) signed an agreement with Disney that gives the SME the right
to produce toys that feature Disney characters such as Winnie the Pooh and Power Rangers.
Franchisors, like licensors, remain in its home market and permits its foreign partners to carry on local
activities.
The franchisee benefits by gaining access to a proven business plan and substantial expertise.
=> examples: Subway, KFC,
Exhibit 3.6 p 72 profiles some of the leading global franchisors.
International collaborative ventures (inbetween exporting and FDI) represent a crossborder business
alliance where partnering firms pool their resources, and share costs and risks of the new venture.
Such a collaborative arrangement allows the focal firm to externalize some of its valuechain activities
and take advantage of complementary technologies & expertise; and overcome trade barriers.
Two Examples:
Joint ventures (JV)
Projectbased nonequity ventures
Joint venture partners create and jointly own a new legal entity through equity investment or pooling of
assets.
Advantages: share costs and risks, gain access to needed resources, gain economies of scale, and pursue
longterm strategic goals.
Examples
Hitachi formed a joint venture with MasterCard to promote a smart card system (Multos) for banking and
other applications.
BP partnered with the statecontrolled Hindustan Petroleum Corporation in India. The new venture built a $3
billion refinery in Punjab and established a joint marketing business, including a network of retail service stations
around India.
Partners in a project based, nonequity venture are focal firms that collaborate through a project, with
a relatively narrow scope and a welldefined timetable, without creating a new legal entity.
Advantages: Partners pool resources and expertise to perform some mutually beneficial business
task, such as joint R&D or marketing, but they do not invest equity to form a new enterprise.
less formal nonequity ventures, and are intended for a fixed duration.
Examples
Cisco Systems has expanded much of its operations through strategic alliances with key foreign players.
With Japans Fujitsu to jointly develop routers and switches that enable clients to build Internet protocol
networks for advanced telecommunications.
In Italy, Cisco teamed with the telecommunications company Italtel to jointly develop network solutions for
the convergence of voice, data, and video to meet growing global demands.
In China, Cisco formed an alliance with telecommunications company ZTE to tap the China and Asian markets.
22


5. Distribution Channel Intermediaries in International business

There are 3 major categories of intermediaries:
Those based in foreign target market
Those based in home country
Those that operate through internet
Intermediaries are distribution and marketing service providers in the value chain for focal firms.
Inteimeuiaiies baseu in the Foieign maiket
! Know very good the difference between agent and distributor! A distributor is an independent businessman
A foreign distributor (a.k.a. merchant distributors) is a foreign market based intermediary that works
under contract for an exporter, takes title to, and distributes the exporters products in a national
market or territory, often performing marketing functions such as sales, promotion, and aftersales
service essentially, they are independent wholesalers that purchase merchandise from exporters (at a
discount) and resell it after adding a profit margin.
An agent brings buyers and sellers together (a.k.a. broker) is an intermediary (often an individual or a
small firm) that handles orders to buy and sell commodities, products, and services in international
business transactions for a commission
An agent is especially important in markets made up of many small, widely dispersed buyers and
sellers, and are common in the international trade of commodities, especially food products and
base minerals.
A manufacturers representative is an intermediary contracted by the exporter to represent and sell its
merchandise or services in a designated country or territory.
Retailer the last link between distributors and endusers in consumer markets, the foreign firm must
get its products to endusers through retailers located in the foreign market.
Dealing directly with foreignbased retailers is efficient because it results in a much shorter distribution
channel and reduced channel costs.
Inteimeuiaiies baseu in the home countiy

For exporting firms that prefer to minimize the complexity of selling internationally, a trading
company (agent) serves as an intermediary that engages in import and export of a variety of
commodities, products, and services.
Typically, they are highvolume, lowmargin resellers and are compensated by adding profit margins
to what they sell are common in commodities and agricultural goods
Exhibit 3.8 provides a list of largest trading companies in the world.
Note that these companies work with remarkably low margins in international trading; they
tend to be highvolume, lowmargin resellers.
Second, note that five of the 10 largest trading companies are based in Japan. This is because
trading companies have historically played a very important role in Japans external trade.
Being an island economy and lacking most raw materials needed for industrialization, Japan had
to import them.
Trading companies are also more common in South Korea, India, and Europe.
In Japan, large trading companies are known as sogo shosha, and are usually involved in both
exporting and importing, and are specialists in lowmargin highvolume trading.
Examples: Mitsui, Mitsubishi, Sumitomo, Itochu, and Marubeni, all firms on the Fortune
magazine Global 500
In the 1990s, total trade of the nine top sogo shosha averaged about 25 percent of Japans total
GDP.
Export management company (EMC) is more common in the United States, and is an intermediary that
acts as an export agent on behalf of (usually inexperienced) client companies.

23

Inteimeuiaiies that opeiate thiough Inteinet online Inteimeuiaiies

The internet has triggered much disintermediation ( the elimination of traditional intermediaries)
Reintermediation, occurs when a new firm injects itself between buyers and suppliers in the online
buying and selling environment
Read more about the new Internetbased international intermediaries in the Global Trend feature
The internet allows suppliers to be more in touch with buyers in more direct ways

Global Trend: Online Retailers: Contemporary Global Intermediaries

This Global Trend explores the explosive growth of online retailing.
EBay, the leading online auctioneer, attracts some 70 million buyers and sellers to its website in a typical
month.
Amazon.com is a leading online retailer with 40 million visitors, selling more consumer electronics than books.
Conventional bricksandmortar retailers websites are growing exponentially (e.g. WalMart and Tesco,
Britains biggest supermarket chain)
The internationalization of online selling indicates an interesting trend: Most of the business of international
online retailers occurs within individual countries, thus each country is a selfcontained marketplace.
Challenges:
Online payment systems persuading global markets to use systems such as PayPal.
Cultural differences Asians are typically reluctant to buy used goods. This is the largest market with
more than 90 million Internet users in China.
Internet penetration much of the world lacks access to it.
Electronic readiness (ereadiness), the degree to which citizens can participate in a knowledgebased economy
Denmark is the most eready country in the world, followed by the United States, Sweden,
Switzerland, United Kingdom, Hong Kong, Finland, and the Netherlands.
In Africa and parts of South Asia, poverty is prevalent and the level of ereadiness is quite low.

6. Facilitators in International Business

They are independent individuals or firms that assist the internationalization and international operations of
focal firms

A logistics service provider is a transportation specialist that arranges for physical distribution and
storage of products on behalf of focal firms, also controlling information between the point of origin and
the point of consumption.
International manufacturers use common carriers, companies that own the ships, trucks, airplanes, and
other transportation equipment used to transport goods around the world.
A consolidator is a type of shipping company that combines the cargo of more than one exporter into
international shipping containers for shipment abroad.
A freight forwarder (a travel agent for cargo) is a specialized logistics service provider that arranges
international shipping on behalf of exporting firms.
Typically based in major port cities, they arrange international shipments for the focal firm to a foreign
entry port and even to the buyers location in the target foreign market.
Value expertise in transportation methods, international trade documentation, export rules and
regulations of the home and foreign countries
Customs brokers are specialist enterprises that arrange clearance of products through customs on
behalf of importing firms; help to navigate foreign tariffs, taxes and complex import rules and
procedures.
Commercial banks are an important player in the international activities of all firms by facilitating the
exchange of foreign currencies and providing financing to buyers and sellers who usually require credit
to finance transactions
Banking is one of the most multinational sectors
24

In other countries , particularly in the developing world, it is commonplace for governments to provide
financing, often through public development banks and agencies
Focal firms and other participants also use the services of international trade lawyers to help navigate
international legal environments
Insurance companies provide coverage against commercial and political risks
International business consultants advise internationalizing firms on various aspects of doing business
abroad and alert them to foreign market opportunities
Market research firms are a potential key resource for identifying and targeting foreign buyers

Recent Graduate in IB
Cynthia Asoka developing a career in global supply chain management
Internships during College: GM auto plants in Argentina and Brazil
Jobs held since graduating:
Peace Corps volunteer in the Dominican Republic
Samsung in Korea
Trade Promotion Organization (KOTRA) of Korea, Chicago office
IBM
Cynthias Advice for an International Career
Constantly seek out opportunities to learn new global skills.
In multinational corporations, all solutions/processes should be applicable across countries, forcing
you to think and act globally, as well as work in global teams.
Success Factors
Dont be afraid to be the trainee focus on skill acquisition rather than titles.
A broad understanding of issues will ultimately help you better identify longterm solutions.

CASE 3: DHL INTERNATIONAL: AN AMBITIOUS COMPETITOR IN GLOBAL LOGISTICS SERVICE

Chapter 4: Theories of international Trade and Investment


Exhibit 4.1 p 95 gives a nice overview!!!!

Why should a country trade?
To earn money, creating welfare
Not all the countries have the same resources
To reach a bigger market

Dubais Successful Transformation into a KnowledgeBased Economy
This vignette underscores the publicprivate partnership that has catapulted Dubai from an oil and gas economy,
which currently contributes less than 10 percent of Dubais GDP, to a successful knowledgebased economy.
This partnership has facilitated Dubai in:
Developing a monopoly in cuttingedge ICT (Information and Communications Technology)
infrastructure, leading to superior firm performance
Developing competitive advantage (firm) in specific industrial sectors, advantages that are
difficult for competitors to replicate
Creating comparative advantages (country) by successfully reposition their economy for the
future, i.e. Dubai, Inc.

Uniqueness of the situation described
Beginning in the 1980s, the publicprivate partnership in Dubai embarked upon an ambitious series of initiatives:
StateoftheArt Commercial Infrastructure The partnership/Dubai built the world's biggest artificial harbor
to accommodate the global shipping industry, international trade, and cruise ships; created the Jebel Ali
Free Trade Zone, a massive business center exempt from international trade barriers that hosts more than
2,000 firms; and developed Dubai Media City, a multicomplex that serves firms in broadcasting, publishing,
advertising, public relations, and market research.