International Business Environment

INTERNATIONAL INTERNATIONAL

MANAGEMENTMANAGEMENT

Chapter 2

International Business Environment International Business Environment – – The TrendThe Trend

Intense Intense competitioncompetition among industries, among industries, firms and countries on a global level is firms and countries on a global level is a recent development.a recent development.

The present trends are towards the The present trends are towards the increasing increasing globalizationglobalization and and interdependenceinterdependence of firms, markets of firms, markets and countries.and countries.

In a bid to meet commitments to In a bid to meet commitments to institutions like WTO, IMF and WB, institutions like WTO, IMF and WB, country after country is country after country is pulling downpulling down barriersbarriers to foreign trade and to foreign trade and investment. investment.

There is a There is a growthgrowth of organization and of organization and administrative structures to manage administrative structures to manage resources and risks across national resources and risks across national boundaries.boundaries.

Quantitative Quantitative restrictionsrestrictions on foreign on foreign trade are being trade are being dismantleddismantled speedily and speedily and tariff barriers are on the decline.tariff barriers are on the decline.

New New opportunitiesopportunities to foreign investors to foreign investors and entrepreneurs are being provided and entrepreneurs are being provided to operate in the countries.to operate in the countries.

The MNCs are The MNCs are expandingexpanding their their operations by aggressively adopting operations by aggressively adopting marketing strategies to local conditions. marketing strategies to local conditions.

In the coming years there may be In the coming years there may be extinctionextinction of many business and of many business and considerable considerable realignmentsrealignments in many in many others by M & A, etc.others by M & A, etc.

In future MNCs will In future MNCs will gear upgear up their their activities due to the presence of huge activities due to the presence of huge potential market.potential market.

Many firms having indigenous Many firms having indigenous technology in less developed technology in less developed economies will economies will fail to competefail to compete with with the MNCs.the MNCs.

Number of small units may Number of small units may close upclose up their activities or may their activities or may mergedmerged with the with the big companies.big companies.

Internationalization-Why?Internationalization-Why? Process by which firms increase their Process by which firms increase their

awareness of the influence of awareness of the influence of international international activitiesactivities on their future, and establish and on their future, and establish and conduct transactions with firms from other conduct transactions with firms from other countries. countries.

Reasons to become international: Reasons to become international: Desire for continued growth Unsolicited foreign order

Domestic market saturation

Potential to exploit new technological advantageClear evidence - Strong correction exists between

improved performance and degree of internationalization

InternationalizationInternationalization

Pull factorsPull factors Push FactorsPush Factors

(Proactive reasons)(Proactive reasons) (Reactive (Reactive reasons)reasons)

Pull factors are forces of Pull factors are forces of attractionattraction which which pull the business to the foreign markets.pull the business to the foreign markets.

Push factors are forces of Push factors are forces of compulsioncompulsion which prompt companies to which prompt companies to internationalize. internationalize.

Pull FactorsPull Factors Push FactorsPush Factors

Relative ProfitabilityRelative ProfitabilityDomestic Domestic

market constraints market constraints

Growth Prospects Growth Prospects CompetitionCompetition

Profit Advantage:Profit Advantage: Even when international business is less Even when international business is less

profitable than the domestic, it would profitable than the domestic, it would increase the total profit.increase the total profit.The AC per unit will be lowest if the plants The AC per unit will be lowest if the plants is operated at is operated at optimum capacity OQoptimum capacity OQ11

Domestic demand constraint makes it to Domestic demand constraint makes it to produce OQ and hence AC is OC or QR produce OQ and hence AC is OC or QR much higher than OCmuch higher than OC11 or Q or Q11I. AC to the I. AC to the extent of CCextent of CC1 1 can be reduced by exporting can be reduced by exporting QQQQ11 amount and the amount and the profitability will profitability will increaseincrease per unit by CC per unit by CC11 per unit. per unit.

0 Q Q1

R

I

AC

C

C1

Growth Opportunities:Growth Opportunities:

MNCS are getting increasingly MNCS are getting increasingly interested in a number of developing interested in a number of developing countries due to the rapid countries due to the rapid rise of rise of income and populationincome and population in these in these countries.countries.

1 billion people1 billion people estimated to be added estimated to be added to the world population between 1999 to the world population between 1999 and 2014. and 2014.

For going international is to take For going international is to take advantage of the advantage of the opportunitiesopportunities in in other countries other countries

Domestic Market Constraints:Domestic Market Constraints:

Domestic Domestic demand constraintsdemand constraints drive drive many companies to expand the many companies to expand the market beyond the national border.market beyond the national border.

TS

DSFS

Sale

For ExampleFor Example:: Nestle derives only about Nestle derives only about 2%2% of its of its

total sales from its to home market, total sales from its to home market, Switzerland. Switzerland.

For Philips, only For Philips, only 8 %8 % of the total sales of the total sales coming from the home market, coming from the home market, Holland, but many different Holland, but many different subsidiaries of Philips have subsidiaries of Philips have contributed much larger share of the contributed much larger share of the total revenues than the parent total revenues than the parent company. company.

CompetitionCompetition Protected marketProtected market does not normally motivate does not normally motivate Companies to seek business outside the home Companies to seek business outside the home

market.market. Economic Economic liberalizationliberalization brings competition from brings competition from

foreign firms as well as from those within the foreign firms as well as from those within the country.country.

Companies take an offensive international Companies take an offensive international competitive strategy by way of competitive strategy by way of counter competition. counter competition.

To To penetratepenetrate the home market of the potential the home market of the potential foreign competitor so as to diminish its foreign competitor so as to diminish its competitive competitive strengthstrength & to protect domestic market share. & to protect domestic market share.

Dimensions of InternationalizationDimensions of Internationalization

Inward-looking Inward-looking Outward-lookingOutward-looking

(Impact of global(Impact of global (Nature of(Nature of

competitors on competitors on competition in competition in foreignforeign

domesticallydomestically market)market)

oriented firms)oriented firms)

Inward-lookingInward-looking( Impact of global competitors on ( Impact of global competitors on

domestically oriented firms)domestically oriented firms)

1.1. Importing/sourcingImporting/sourcing

2.2. Acting as Licensee from a foreign Acting as Licensee from a foreign companycompany

3.3. Establishing JV inside the home Establishing JV inside the home country with foreign companiescountry with foreign companies

4.4. Managing as a wholly owned Managing as a wholly owned subsidiary of a foreign firm. subsidiary of a foreign firm.

Outward-LookingOutward-Looking(Nature of competition in foreign market(Nature of competition in foreign market

1.1. ExportingExporting

2.2. Acting as Licensor to a foreign Acting as Licensor to a foreign companycompany

3.3. Establishing JV outside the home Establishing JV outside the home country with foreign companiescountry with foreign companies

4.4. Establishing wholly owned business Establishing wholly owned business outside the home country. outside the home country.

Managerial Issues on Production and Managerial Issues on Production and

SourcingSourcing From where should the firm From where should the firm supplysupply the target the target

market?market? To what extent should the firm itself To what extent should the firm itself undertake undertake

production?production? To the extent that it does not, what and where To the extent that it does not, what and where

should itshould it buy buy from others?from others? To the extent that a firm opts to do at least some To the extent that a firm opts to do at least some

manufacturing, how should it manufacturing, how should it acquire facilitiesacquire facilities. . Should the firmShould the firm produceproduce in one plant or many, in one plant or many,

related or autonomous?related or autonomous? What sort of What sort of technologytechnology should it use? should it use? What What sitesite is best? is best? Where should Where should research and developmentresearch and development be be

located? located?

Licensing-IssuesLicensing-Issues Types of firmsTypes of firms that license-out that license-out PredominantPredominant industries industries involved involved RevenuesRevenues generated generated CountriesCountries they license to they license to CostsCosts of negotiating & administering of negotiating & administering

license agreementslicense agreements Common termsCommon terms in their license in their license

agreementsagreements Areas in which there is Areas in which there is most most

disagreementdisagreement

For LicensorFor Licensor

Licensing is a chance to Licensing is a chance to exploitexploit its technology its technology in markets that are too small to justify in markets that are too small to justify larger larger investmentsinvestments or in market that restrict imports or in market that restrict imports

or FDI.or FDI. Means of Means of testingtesting and and developingdeveloping a market. a market.

For LicenseeFor Licensee

Permits the Permits the acquisition of technologyacquisition of technology more more cheaply than by internal development.cheaply than by internal development.

Allows a firm to acquire a technology that, Allows a firm to acquire a technology that, whenwhen combined combined with other skills already with other skills already

present, permits it to present, permits it to diversify. diversify.

Managerial IssuesManagerial Issues

For LicensorFor Licensor – Risks of losing a – Risks of losing a technological technological advantageadvantage, , reputationreputation and and potential potential profitsprofits..

For the LicenseeFor the Licensee – Risks that the – Risks that the technology will technology will not worknot work as expected or as expected or will will cost morecost more to implement than to implement than anticipated.anticipated.

Management of International JVsManagement of International JVs

Why the Why the particular marketparticular market is being is being chosen?chosen?

Why the Why the investmentinvestment is occurring? is occurring?

Whether now is the Whether now is the appropriateappropriate time?time?

Management of International JVsManagement of International JVs

To To combinecombine complementary skills complementary skills from different organizations.from different organizations.

To assure or speed To assure or speed market accessmarket access.. To meet a To meet a technological gaptechnological gap.. To strategically To strategically respondrespond to more to more

intense competition.intense competition.

NEEDNEED

Managerial IssuesManagerial Issues

Whether it isWhether it is equity-basedequity-based?? LengthLength of the agreement. of the agreement. Whether a whole Whether a whole range of resourcesrange of resources

and right transferred?and right transferred? MethodMethod of resource transfer. of resource transfer. Typical Typical compensationcompensation method. method.

Global Manager-Challenges…Global Manager-Challenges…

Ability to Ability to developdevelop and and use global use global strategic skills.strategic skills.

Manage Manage changechange and and transitiontransition.. Manage cultural Manage cultural diversitydiversity.. Design and function in Design and function in flexible flexible

organization structuresorganization structures.. Work with others and in Work with others and in teamsteams.. Communicate, learn and Communicate, learn and transfertransfer

knowledgeknowledge in an or organization. in an or organization.

Effects of Globalization on theEffects of Globalization on the World Economy World Economy

The Global economy is becoming The Global economy is becoming come come integratedintegrated day by day. day by day.

Volume of World trade (4.0 %) has Volume of World trade (4.0 %) has grown at a grown at a faster ratefaster rate than volume of than volume of World output (1.5 %).World output (1.5 %).

Trend of Trend of lowering the barrierslowering the barriers to the to the free flow of goods, services and free flow of goods, services and capital among countries.capital among countries.

FDIFDI has been playing a crucial role in has been playing a crucial role in the global economy.the global economy.

Imports are Imports are penetrating deeperpenetrating deeper into the into the world’s largest economies as well.world’s largest economies as well.

Growth of world trade, FDI and imports Growth of world trade, FDI and imports lead to more lead to more foreign competitionforeign competition in the in the domestic markets.domestic markets.

Domestic firms are required to Domestic firms are required to enhanceenhance the the production & distributionproduction & distribution capabilities capabilities to compete with foreign players.to compete with foreign players.

Companies have started Companies have started looking the looking the worldworld as a market for their products. as a market for their products.

Innovations Innovations have started spreading have started spreading faster.faster.

OpportunitiesOpportunities have been increasing have been increasing for the firms.for the firms.

Companies have started Companies have started dispersingdispersing their manufacturing, marketing and their manufacturing, marketing and research facilities around the globe research facilities around the globe where cost and skill conditions are where cost and skill conditions are most favorable.most favorable.