GLOBALIZATION &

INTERNATIONAL BUSINESS

28th JULY, 2014

MBA Evening Program

Flow

What is international Business?

Factors Affecting International Business

Elements of International Business

Globalization

Drivers of Globalization

Entry to International Business

International Business Strategies

Example

Video Analysis of India as a Favoured Destination

for International business

Philips Case

Matsuhita Case

What is International Business?

International business can be defined as any business that crosses the national borders of a country.

It includes importing and exporting; international movement of goods, services, employees, technology, licensing, and franchising of intellectual property (trademarks, patents, copyright and so on).

International business includes investment in financial and immovable assets in foreign countries.

Contract manufacturing or assembly of products for local sale or for export to other countries, establishment of foreign warehousing and distribution systems, and import of goods from one foreign country to a second foreign country for subsequent local sale is part of international business.

Factors Affecting International Business

Elements of International Business

Legal and regulatory framework

Financial management

Trade barriers and tariffs

Accounting and taxation

Culture

Market forces

Legal and Regulatory Framework

This framework refers to companies having to comply with the law of the land they operate in.

Companies involved in international business may have to comply with laws of more than one country. This certainly poses a challenge as each country has its own set of laws.

These companies have to ascertain that their scope of business is within the regulatory framework set by the authorities of that country.

Financial Management

Trade Barriers and Tariffs

In a domestic scenario, a company can move its goods and services almost freely within the country. But in international trade, companies face issues like licensing, anti-dumping laws, quota restrictions, and tariffs for their business operations in a foreign country or region

Accounting and Taxation

Domestic businesses need to comply with the accounting and taxation standards prevailing in that country. A company with international operations has to comply with the accounting standards and tax laws of the foreign country as well.

Culture

In a domestic market, a business deals with a homogenous culture whereas a company with international business has to deal with heterogeneous cultures in multiple countries.

The company's management has to study different cultures and get accustomed to different languages, culture, sentiments, and traditions of the foreign country in order to conduct business productively.

Market Forces

Demographics of each country have its own perceptions about different products and services. The local, political, economic, and technological environments differ from country to country. While these differences are at a macro level, at the micro level we have to consider several other factors. They may be in terms of customer preferences, product placement, pricing, advertising, distribution channels and so on.

An international company has to face the challenges of multiple regional customers, each with unique requirements.

Globalization

Globalization is a process where businesses are dealt in markets around the world, apart from the local and national markets.

According to business terminologies, globalization is defined as 'the worldwide trend of businesses expanding beyond their domestic boundaries'.

It is advantageous for the economy of countries because it promotes prosperity in the countries that embrace globalization.

Drivers of Globalization

Global Market Place

International business has become easier since the advent of internet and the emergence of e-business. A company must have a good product, the right strategy and an appetite to take risk at the global marketplace in order to do business internationally.

Emerging Markets

Compared to developed countries, developing countries are growing at a healthy pace, thus reducing the barriers of trade. Emerging markets provide an unexplored marketplace with unlimited potential and scope for business.

Any company with good or innovative products and services cannot afford to ignore the opportunities provided by these emerging markets.

Foreign Direct Investment (FDI) policy of a nation lays down the foundation for competitive and prosperous market conditions.

Embracing globalization has become a vital component of development strategy for developing countries, and is being used as an effective instrument of economic growth.

Some countries like China, India, and Philippines also provide tax holidays to foreign companies for setting up their business (in certain sectors) in these countries. Such incentives make these countries an attractive destination for companies looking for low cost production.

Small Domestic Market

A company, which is mature in its domestic market, is driven to sell in more than one country because the sales volume achieved in its own domestic market is not large enough to fully capture the manufacturing economies of scale. For example, Nokia is an international company based in Finland.

Diminishing Trade and Investment Barriers

The lowering of barrier to trade and investments (by most countries around the world) also provides an opportunity to companies looking for expanding their business.

Expanding into a foreign country provides access to low wage labourers, highly skilled work force, larger market base and so on. Companies have a chance to set up subsidiaries in low-cost countries for manufacturing their products.

Easy flow of goods and services results in the company literally designing the product in one country, manufacturing the various components in different countries, assembling the final product in a third country and marketing the product across the world.

Technological Innovation

The advent of internet and e-commerce, advancement of telecommunication, information technology, and improvement in logistics have changed the dynamics of business operations.

The use of mobile telephony, wireless communications, and satellite connectivity has reduced the time needed for decision making at an international level.

Constant innovation in technology has enhanced information flow between geographically remote areas, thus bringing the markets of different countries closer and paving the way for international business.

Changing Demographics Most developed countries face challenges in sourcing

workforce as the average age of the population is getting older.

In the next 10 years, most of the industrialised nations will have to depend on sourcing its workforce from countries like India, China and other countries, where the population is young, with abundance of skilled labour.

India alone produces close to five lakh engineers and one million English speaking graduates and other diploma holders per year.

Entry to International Business

For a company that wants to expand internationally, there are several available entry options. They are listed as follows:

Export strategy.

Licensing.

Franchising.

Foreign direct investment.

Export Strategy

This method remains the most common means of entry into international markets.

Export strategy is a very attractive option that is merely an extension of domestic operations.

It also minimizes the risk component as well as the capital requirement.

The host company's involvement in the international market is limited to identifying customers for marketing its products.

Licensing

A domestic company can license foreign firms to use the company's technology or products and distribute the company's product.

By licensing, the domestic company need not bear any costs and risks of entering foreign markets on its own, yet it is able to generate income from royalties.

The reverse of this arrangement is the risk of providing valuable technological knowledge to foreign companies, and thereby losing some degree of control over its use.

Monitoring licenses and safeguarding company's Intellectual Property Rights can prove to be challenging in an international scenario. Puma adopted licensing strategy post 1999.

Franchising

Licensing works well for manufacturing companies but franchising is a better option for international expansion efforts of service or retailing companies.

Franchising has the same advantages as licensing. The franchisee bears almost all the costs and risks in establishing the foreign operations.

The franchiser's contribution is limited to providing the concept, technology and training the franchisee in the already established model. Maintaining quality poses the biggest challenge to the franchiser. McDonalds uses franchising model.

Foreign Direct Investment (FDI)FDI is the investment made by a company in a foreign country to start its operations. Various options available for an FDI are as follows:

Whole owned subsidiary - This option is viable if a company is willing to take all the risks of all the operations pertaining to its business in a foreign country. A subsidiary can be formed from scratch (green field investment) to manufacture and market its products and services in a foreign country. A firm can also export its products or services to other countries from its subsidiaries. American Airlines is a wholly owned subsidiary of AMR Corp.

Joint Ventures (JV) - This is a very popular mode of entry into foreign markets, as it minimizes business risk and investment. It is owned by one or more firms in proportion to their investment. If a JV is done with an existing competitor, it could be termed as a strategic alliance. Sony Ericsson is an example of joint venture between Sony, a Japanese company and Ericsson, a Swedish company.

Merger or acquisition - A company can merge into or acquire an existing company with established operations in a foreign country. It saves a lot of time in construction, initial setup, and regulatory approvals and so on. In the bargain, the acquiring company can use all the established brand names, distribution networks and so on of the acquired company. Eg. Proctor and Gamble

Strategic investment - Any firm to a share in the profits, if any. The shareholding can be a minority stake can purchase a stake in a foreign company, whereby they are entitled and may be without voting rights. Generally, the investing company does not participate in the management of the target company.

Types of International Strategies

Multi Domestic StrategyGlobal Strategy

A fully multi-local value chain will have every function from R&D to distribution and service performed entirely at the local level in each country. At the other extreme, a fully global value chain will source each activity in a different country.

Multi Domestic Strategy Global StrategyProduct customized for each market Product is the same in all countries

Decentralized control - local decision making

Centralized control - little decision-making authority on the local level

Effective when large differences exist between countries

Effective when differences between countries are small

•Advantages: product differentiation, local responsiveness, minimized political risk, minimized exchange rate risk

Advantages: cost, coordinated activities, faster product development

Philips casePhilips is a good example of a company that followed a multidomestic strategy. This strategy resulted in:Innovation from local R&D

Entrepreneurial spirit

Products tailored to individual countries

High quality due to backward integration

The multi-domestic strategy also presented Philips with many challenges:

High costs due to tailored products and duplication across countries

The innovation from the local R&D groups resulted in products that were R&D driven instead of market driven.

Decentralized control meant that national buy-in was required before introducing a product - time to market was slow.

Matsuhita CaseMatsushita is a good example of a company that followed a global strategy. This strategy resulted in:Strong global distribution network

Company-wide mission statement that was followed closely

Financial control

More applied R&D

Ability to get to market quickly and force standards since individual country buy-in was not necessary.

The global strategy presented Matsushita with the following challenges:

Problem of strong yen

Too much dependency on one product - the VCR

Loss of non-Asian employees because of glass ceilings

QUESTIONS?

Source of Information

Books to be referredInternational Business by John Daniels, Pearson Education, Latest Edition