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INTRODUCTION:

Understanding Major Issues in

International BusinessA/Prof Sumit Mitra

IIMK

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Opening Case: The Globalization of

Health Care There is a shortage of

radiologists in the UnitedStates and demand for their

services is growing twice as

fast as the rate ofgraduation

Solution to the problem:

Send images over the

Internet to be interpreted by

radiologists in India

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Sumit Mitra IIMK IB

Major events affecting global business

Socio-polical and economic changes

fall of Soviet Block, unification of GermanyGulf war, formation of EU and Euromoney

Major changes in IT, electronics and other world

industries

Current Crisis in above and more

Noticable is

RAPIDITY of change (subprime-2008)

Regionalism - Trade Blocks like NAFTA,

ASEAN (Asia outside crisis)

Nationalistic character- BRIC2013-14

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Why is all this critical

Because we have globalization

Business operating across national boundaries

Affecting sovereign states

Needing central monitoring- supranational

bodies/ institutions like UN,IMF, WB and now

WTO

Resulting feeling of Regional similarity

Creation of Multinational Corporations

(MNC)2013-14 Sumit Mitra IIMK IB

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Why firms Internationalize ?

Primary reasons for internationalizing

cheap sources of raw material and labour

(Globalization of Production)

large size of markets

(Globalization of Markets)

Internationalizing firms is only a microcosm of IB

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Types of International Activities

IB does not necessarily involve MNCs operating

across borders. It could be domestic firmsinvolved in:

Exports/Imports

Direct Investment Licensing

Portfolio Investment

Loans

Unilateral Transfers

It is about seamless linkage of business across the

world- The World is Flat2013-14

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History Historically it is about trade across the

world: China to Europe via Venice Silk Route

Rise of European trading cos. Like Dutch and

English East India Company Barter followed by trade in bullioninsources

of comparative advantage

Indian-spices, muslin, Chinese-silk/tea

English East India Co. May be first MNC

with a BOD, stock trading

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Definition

Latest waves of MNCs from Europe, US, Japan,

Korea, BRIC in that order.

Transnational Corporations/Multinational

Companies (MNC) as defined by Vernon and

Wells have the following characteristics:1. They are linked by ties of common ownership

2. They draw on a common pool of resources, such

as money, credit, IT, patents.

3. They respond to some common strategy.

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Theory of IB

International Product Cycle Theory: (R.Vernon)

1ststage: New products would first be introduced indeveloped demanding and large markets with highest per

capita income.

2nd stage: product will need more customers, dd from similar

markets thru exports3rd stage: foreign production to discourage local production

abroad (MNC)

4th stage: Highly standardized product, high vol, low margins

so go to LDCs for cheap inputs like labour. Export back toDC cheap. New innovations

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Globalization of Production

Historically this has been primarily confined to

manufacturing enterprises

Increasingly companies are taking advantage ofmodern communications technology, and particularly

the Internet, to outsource service activities to low-cost

producers in other nations


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The Role of Technology

Lowering of trade

barriers made

globalizationpossible; technology

has made it a reality

Since the end ofWorld War II the

world has seen

advances in Communication

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Changing Nature of

Multinationals Non-U.S. Multinationals

In the 1960s global business

activity was dominated by

large U.S. multinationalcorporations

In 1973 48.5% ofmultinationals were U.S. firms

In 2002 28% of largestmultinationals were U.S. firms

Globalization of the worldeconomy has resulted in arelative decline in thedominance of U.S. firms in the

global marketplace

Rise of Mini-Multinationals Growth of medium-size and

small multinationals hasbecome a trend ininternational business

Consider Lubricating SystemsInc. which employs 25 peopleand generates sales of $6.5million, of which $2 million are

from global sales International business is

conducted not just by largefirms but also by medium-sizeand small enterprises

Return


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The Globalization Debate

Pro Factors Lower prices for goods and

services

Economic growthstimulation

Increase in consumerincome

Creates jobs

Countries specialize inproduction of goods andservices that are producedmost efficiently

Con Factors Destroys manufacturing

jobs in wealthy, advanced

countries Wage rates of unskilledworkers in advancedcountries declines

Companies move tocountries with fewer labor

and environmentregulations

Loss of sovereignty


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Theory of IB

Multinationality as a state of mind: Belief of managers that

degree of multinationality affects viability of firm

MNCs are new kind of institutions for 21st centuryHome country superiority:

Ethnocentricity: Accept our methods of business

Host coutry attitude

Polycentricity: Host country cultures different , manage

locally.

Geocentrism: Unileverize Indians & Indianize Unilevers2013-14

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Wave of MNCs

First from colonial origins: Unilever, Nestle

Post WW-II US MNCs: P&G, Caterpillar,

Coke

Japanese and Korean: Post-technology leap-

Matsushita, Toyota, Hyundai, Samsung

MNCs from Emerging economies: Haier

from China, Tata Corus from India and

Cemex from Mexico2013-14 Sumit Mitra IIMK IB

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Theory of IB

Impact of Culture on IB

Culture plays an important role by influencing assumptions,

beliefs and values of individual e.g

Affects way people dress, food habits etc.

Therefore for MNCs it is frequently required to modify their

global strategies to meet local needs

e.g Britishers take tea hot, US use it as summer drink to beserved with ice.

Balancing local and global needs

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Industry competitiveness

Determinants of national competitive advantage:

Industry structure

Demand condition

Related &

Supporting Ind.

Factor conditions

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Service industry characteristics

Deals with intangible products

Producttion and consumption instantaneous and

hence at same place

Perishable

Historically thought as non-productive activity. High international trade through electronic media

and IT.

As labour intensive so shift to LDCs. Customer focus very important.

Standardization difficult

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Rise of China

Dominance of manufacturing industry-

cheap labour

Artificially low xchange rate withUSD/Yuan

Closer to markets


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Major Issue

Need to exploit economies of scale Vs Need to be locally responsive.

But Ghemawat says in his AAA model

Economies of scale isAggregation

Local Responsiveness isAdaptation

Exploiting difference between national and

regional markets isArbitrage

Companies stress different As at different stages oflifecycle e.g. IBM India-Global services


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THANK YOU

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Documents

IB_intro