CHAPTER ONE REVIEW MATERIALS

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Nov 20, 2013 (3 years and 11 months ago)

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CHAPTER ONE REVIEW MATERIALS


(“THE CHALLENGING WORLD OF INTERNATIONAL BUSINESS”)




International Business

=
A business whose activities are carried out across national
borders.



Ca.

30% (if not more) of the top 700 CEO’s in the USA have had international business
experiences.

This percentage will definitely continue to grow.



International Business Terminology:

Terms do vary by individuals and
companies;
e.g., some people refer to i
nternational business by using
the term “
world
” and others

globa
l” and others “
international
” or “
multidomestic
” or even “
multinational
” and
still others “
transnational
.”



A “
multinational
” corporation is normally defined as a company which is like a
holding

company
, in that it has a large

number of overseas operations (affiliates and/or
subsidiaries).



A “
multidomestic
” company is a multinational organization, but can be further
defined as a company wherein
each individual foreign affiliate

is left to

adapt its

products and marketing strategies

to what local managers perceive to be unique
aspects of their individual markets
, meaning perceived market difference
s
. Indeed,
some managers refer to
a


multidomestic
” company as a


multilocal

company, but
no
t too often
.



The United Nations and some other folk refer to a “multinational”

as a “transnational”
which is
their definition of
a company doing business in more than one country.



A “
global
” reference of a company tends to imply
the company
attempts to

standardize

and integrate

activities in

functional areas worldwide
. A “functional” area
is (for example) manufacturing, human resource management, finance, etc. etc.

The
reason

for this standardization of functional areas worldwide is
to reduce costs
.



So
, my definition of a “
transnational
” company is a company that combines “global”
and

multinational


characteristics, which means
the
top
management of a
“transnational” company is

managing their international companies in a manner so as
to

build economies

of scale in functional area
s in order to cut costs
, but it is also
responding to local market needs.”





Note, however, that some business executives define a “transnational” as a company
formed by a merger of two firms of approximately the same size that
are from
different countries.



International business

differs from
domestic business

in that a firm operating across
borders must deal with the forces of three kinds of environments (DOMESTIC,
FOREIGN, and INTERNATIONAL)



Remember: A simple definition is th
at an “International Business” is
a business whose

activities are carried out across national borders
; and a “Foreign Business”
refers to

the operations of a company outside its home or domestic market
; and an

International Company
” can be a “
global
” or “
multidomestic
” or a

transnational
” company.



NOTE: American companies want their managers to have
a basic knowledge

of
international business. This is true for senior managers of
ALL

large international
companies!!

This is true also for small and medium
-
size companies.



Simply stated….t
he increased internationalizati
on of business requires that
ALL

managers have a basic knowledge and understanding of international business.



T
here is an emphatic need for
ALL

business

people to have a basic knowledge of
international business.



American CEO’s want business graduates from universities today to have some
education in international business if they are going to work overseas and even if they
are going to work in a firm wit
h no foreign operations.



NOTE:
International business has been influenced by practices
even before the time of
Christ

and

by
the rise of the Ottoman Empire
.



In 1600, Great Britain”s British East India Company set up operational branches in
Asia.



In 1602,
The Dutch East India Company was formed to set up trade routes in Asia, etc.
This company was the first company to issue stock. It is also often thought of as the
first Multinational Corporation in the world.



In the 17
th

and 18
th

centuries the “age of Me
rcantilism” came into being (A nation’s
wealth depends on accumulated wealth….gold!!)



Indeed, while international business “as a discipline” is relatively new, international
business as a business practice is not!!



Many senior managers of today’s corporati
ons have stated that no one will be in a
general manager’s position in the years ahead if they do not have international
exposure and experience. THAT IS A FACT!



So, stated once again,
CEO’s of major companies today are totally convinced that
business gra
duates they hire should have some education in the international aspects
of doing business.



A fact:
One of every six U.S. jobs is tied to foreign investment that is made into the

USA
. And, if you work for a company in the USA that is owned (or even partially
owned) by
companies in
other countries

you must understand the international
aspects of doing business.



All companies

today,
whether they have foreign operations or not
, need to
be aware
of what is occurring globally in their markets and in their industries.



I REPEAT:

Companies that have sizeable operations in more than one country are
called global companies and multidomestic firms;

an international business is a
business whose
activities involve crossing national borders; an international company
refers to both global and multidomestic firms;

foreign business denotes the domestic
operations within a foreign country; a multidomestic company is an organization with
multicountry af
filiates.



A FACT:

A major goal of a “multicultural multinational” is to exploit its knowledge and
technological capabilities on a global basis.



Interesting tidbit:

Eli Lilly and Company was first a domestic company, then a foreign
business, then an inter
national business, then a multinational, then a global and/or
transnational company.



NOW:

There are five major kinds of drivers, all based on change, that are leading
international firms to the globalization of their operations;

Political, T
echnological,
Market, Cost, and C
ompetition.



A key difference of firms of the early 1900’s and today’s companies are their explosive
growth and the increasing globalization of their products and markets.



Total foreign direct investment (FDI) is a commonly used variable
to determine where
and how fast internationalization takes place worldwide.



“Exporting”

refers to transporting goods or services outside of your country or your
region.



The United Nations estimate that in 2004 there were
70,000

corporations which
accounted

for a
round 25% of world trade and about

2/3 of global output.



In 2004
only 19 nations

had
gross national incomes (GNI)

greater than the total annual
sales of Wal
-
Mart worldwide.



Also in 2004 the total amount of money spent in Wal
-
Marts worldwide was great
er
than the combined GNI’s of the 112 smallest economies of the 208 listed in the World
Bank’s World Development database.



Definitely
, supporters of globalization argue that it is the best strategy for advancing
the world’s economic development
.



And, it is a fact that
expanded international trade is linked with the creation of more

and better jobs.



But,
it is also a fact that globalization has produced uneven results across nations and
their people
.



Some opponents of globalization argue

that it ha
s had harmful effects on labor and
labor standards
.



Moreover, some o
pponents of free trade leading to enlarged globalization also argue
that this has contributed to a decline in environmental and health conditions.



International business

differs from
domes
tic business
in that a firm operating across
borders must deal with the forces of three kinds of environments
---
domestic
, foreign
,
and international

---

w
hereas normally companies that do business only in one
country need to be primarily concerned about t
he domestic environment.



“Environment”

is the sum of all the forces surrounding and influencing the life and
development of a firm. Some are
controllable (“internal”)

and some are
uncontrollable (or “external”).



UNCONTROLLABLE (EXTERNAL) FORCES INCLUDE:

Competitive, Distribution,
Economic, Socioeconomic, Financial, Legal, Physical, Political, Sociocultural, Labor,
Technological.



CONTROLLABLE (INTERNAL) FORCES INCLUDE:

Factors of production (e.g., capital, raw
materials and people), and activities of the organization (e.g., personnel, finance,
production, and marketing).



Managers must, therefore, administer (manage) the controllable forces in order to
adapt to the chan
ges that occur in the uncontrollable environmental variables
.



Managers
have no

“direct” control over the external environment of a firm, but they
can exert influences by heavy promotion of new products to change cultural attitudes,
and lobbying, etc.



The d
omestic environment is composed of all the uncontrollable forces originating in
the home country that influence the life and the development of a company.



Forces in the foreign environment are the same as those in the domestic environment
except they occur

in foreign nations.



One problem with the foreign forces is that they are frequently
difficult to assess
,
especially their legal and political elements.



The International Environment

consists of the interactions between the domestic
environmental forces and the foreign environmental forces. Also, between the
foreign environmental forces of two countries when an affiliate in one country does
business with customers in another.



Working

in an international environment involves much more difficult decision
making than in a purely domestic environment.



“Self
-
reference criterion”

relates to an unconscious reference to one’s own cultural
values when judging behaviors of others in a new and d
ifferent environment
.



Hence, successful managers are careful to examine a problem in terms of the local
cultural traits as well as their own.



Foreign subsidiaries (affiliates) must obey the local laws. If they do not, they are
subject to legal action by t
he host country and seizure by the host government.



Foreign direct investment (FDI) refers to direct investments into equipment, structures,
and organizations
in a foreign country at a level that is sufficient to obtain

significant
management control
.



Exporting

refers to the transportation of any domestic good or service to a destination
outside a country or region.



Importing

refers to the transportation of any good or service into a country or region,
from a foreign origination point.



REMEMBER: “
Envir
onmen

t

is the sum of all the forces surrounding and influencing
the life and development of a firm.



“ECONOMIC GLOBALIZATION”

The tendency toward an international integration of
goods, technology, information, labor and capital, or the process of making
this
integration happen.



Theodore Levitt
, a Harvard Professor
, coined the term “globalization” and defined it as
“new technologies had proletarianized communication, transport, and travel, creating
worldwide markets for “
standardized”

consumer products at lower prices.” He was
almost right, but the term standardized is questionable.



MOTIVES FOR ENTERING FOREIGN MARKETS:

The two main reasons are 1. To
INCREASE SALES AND PROFITS and 2. To PROTECT MARKETS, INCLUDING PROFITS AND
SALES (S
ee break
-
down of these two reasons on pages 20
-
23).



When organizing their international activities, there are at least SEVEN DIMENSIONS
ALONG WHICH MANAGEMNT CAN GLOBALIZE (“STANDARDIZE”):

1.

Product

2.

Markets

3.

Promotion

4.

Where value is added to the product

5.

Compe
titive Strategy

6.

Use of non
-
home country personnel’

7.

Extent of global ownership in the firm

(NOTE: The challenge for company managers is to determine how far the firm should go with
each of the dimensions. Usually the amount of globalization will vary amon
g the dimensions.
For example, in the book it states
that promotional activities for washing machines might be
standardized to a great extent: People use them to get their clothes clean. However, for
economic reasons, in poorer countries the machines mu
st be simpler and less costly and,
therefore, the product is not standardized worldwide….
)


FINALLY:
ALWAYHS REMEMBER THAT THE OVERALL GOAL OF ANY COMPANY IS “
TO ACHIEVE
AND MAINTAIN A COMPETITIVE ADVANTAGE”.

(COMPETITIVE ADVANTAGE =
“THE
ABILITY OF A CO
MPANY TO HAVE HIGHER RATES OF PROFITS THAN ITS
COMPETITORS!!)