Ch 1 Introduction What is International Business

International BusinessStrategy, Management and the new Realities

Cavusgil . Knight . Riesenberger
Dr. Reham Elseidi
Ain Shams University Business Administration Department

Semester Overview

* Lecture: Saturday: 12:00 pm – 02:00 pm Monday: 08:00 - 10:00 am.Venue: FLO.1, Building D, Elseidi Hall Office Hours: Tuesday 12:00–2:00 pm Office: BB-203Email: rehamelseidy@gmail.com Dr. Reham Elseidi
Ain Shams University, Business Administration Department

Assessment

Dr. Reham Elseidi
Ain Shams University, Business Administration Department
* Final Exam 15 Grades Mid-term examination 3 Grades In-Class Performance Projects / Presentations/ Quiz 2 Grades Attendance is mandatory. Students are expected to be prepared for every class and will be expected to participate in class discussions.

Course Outline

Dr. Reham Elseidi
Ain Shams University, Business Administration Department
* Introduction to International Business Globalization of Markets and the Internationalization of the Firm (ch.2+small part from ch.3) The Cultural Environment of IB (ch.4) Ethics and International Business(ch.5) Political and legal Systems in National environments(ch.7) Government Intervention in international Business (ch.8) regional economic integration (ch.9) Emerging Markets, Developing Economies and Advanced (ch.10) Exporting and countertrade (ch.14) Foreign Direct Investment and Collaborative Ventures(ch.15) Licensing, Franchising, and other Contractual Strategies(ch.16) Global Sourcing and Marketing in the Global Firm(ch.17 + small part from ch.18)


International Business: The New Realities by Cavusgil, Knight and Riesenberger

Learning Objectives

What is international business? What are the key concepts in international trade and investment? How does international business differ from domestic business? Who participates in international business? Why do firms internationalize? Why study international business?

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Knowledge Check
Dr. Reham Elseidi
Ain Shams University, Business Administration Department
* According to the United Nations Development Programme, This country ranks the highest in terms of Human Development. Luxembourg Norway Peru Iceland The Flag of this country is depicted by plain green Saudi Arabia Libya Nigeria Georgia

Knowledge Check Contn’t Dr. Reham Elseidi

Ain Shams University, Business Administration Department
* Which Countries are the main suppliers of the world’s bananes?Ecuador, Costa Rica, Philippines and ColombiaIndia, Peru & EcuadorIndia, Peru & BrazilSouth Africa, Malaysia & IndiaThe country has the highest birth rateChina IndiaNigerMexicoWith which of these countries does the US maintain diplomatic Relations?BhutanCubaIranVietnam

Knowledge Check Contn’t The World Bank is often seen as the lender of last resort to nation-states whose economies are in turmoil and currencies are losing value against those of other nations.
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Exercise

Examine your clothing, watches, cell phones, I-phones, I-pods and report where in the world each item was manufactured?


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A Day in the Global Economy: Julie Valentine

In the Opening Vignette, while visiting a shopping mall, Julie Valentine:Ate food from Argentina, Brazil, Costa Rica, France, Italy, and Spain.Used or shopped for various items, including cars, clothing, and electronics, from China, Finland, France, Indonesia, Germany, Hungary, Japan, Malaysia, Mexico, the Netherlands, South Africa, South Korea, Taiwan, and several other countries.Like you, Julie’s life is touched every day, in various ways, by international business.
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The Nature of International Business

All value-adding activities—including sourcing, manufacturing, and marketing—can be performed in international locations.International trade can involve products, services, capital, technology, know-how, and labor.Firms internationalize through various entry strategies, such as exporting and foreign direct investment.
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International Business – A Firm Level Activity Dr. Reham Elseidi

Ain Shams University, Business Administration Department
* Performance of trade and investment activities by firms across national borders. Academics and researchers also refer to IB as cross-border business. IB has gained much speed and complexity over the past two decades. IB gives you access to products and services from around the world and profoundly affects your quality of life and economic well-being

Key Concepts in International Business

Globalization of markets (a Macro Concept) : Ongoing economic integration and growing interdependency of countries worldwide. Integration is central to globalization, which has resulted in the widespread diffusion of products, technology, and knowledge worldwide, regardless of where they originate. refers to the merging of historically distinct and separate national markets into one huge global marketplace.

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Dimensions of Market Globalization
Greater integration and interdependency of national economies; leading to freer movement of goods, services, capital, and knowledge Rise of regional economic integration blocs Growth of global investment and financial flows Convergence of consumer lifestyles and preferences Globalization of production


Ain Shams University, Business Administration Department
Dr. Reham Elseidi
*

1-* refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital). Companies can lower their overall cost structure improve the quality or functionality of their product offering EX: Boeing 777&787, healthcare can be outsourced today! Hospitals now routinely send X-rays via the Internet to be read in India
Globalization of Production

Key Concepts (cont.)

International trade and investment are the most conventional forms of international business transactions. Trade = goods and services cross national borders. Cross-border investment= the firm itself crosses borders.
International Business: The New Realities
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Key Concepts (cont.)

International trade: Exchange of products and services across national borders, typically through exporting and importing.

International Business: The New Realities

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Key Concepts (cont.)

Exporting: Sale of products or services from a base in the home country or a third country to customers located abroad. Boeing and Airbus export billions of dollars in commercial aircraft products every year. Importing or Global Sourcing: Procurement of products or services from suppliers located abroad for consumption in the home country or a third country. Toyota imports many parts from China when it manufactures cars in Japan.


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Key Concepts (cont.) International investment

Dr. Reham Elseidi
Ain Shams University, Business Administration Department
* Transfer of assets to another country or the acquisition of assets in that country. International Portfolio investment (typically short-term) is the passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns. Foreign direct investment (FDI) (typically long-term) 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. (Bank of Alexandria)

The “Flows” of International Business

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The Nature of International Trade 

Dr. Reham Elseidi
Ain Shams University, Business Administration Department
* Macro-International Trade: Aggregate export and import flows of products and services between nations. Micro-International Business: Cross-border transactions of an individual business enterprise. Gross domestic product (GDP) is the total value of products and services produced in a country during a year. World exports grew more than thirty-fold during the last few decades, while world GDP grew more than tenfold.

World Trade Is Growing Faster than GDP

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World Trade Is Growing Faster than GDP

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World Trade Is Growing Faster than GDP

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World Trade Is Growing Faster than GDP

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World Trade Is Growing Faster than GDP

The exponential growth of cross-border trade relative to world GDP is due in part to advanced economies such as Canada and Japan sourcing to low-cost locations, e.g. China and Mexico. The rapid integration of world economies is fueled by factors such as the decline of trade barriers, e.g. tariffs, liberalization of markets, privatization and the economic vitality of emerging markets.
* Ain Shams University, Business Administration Department
Dr. Reham Elseidi

Leading Countries in International Merchandise Trade, by Total Annual Value

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Leading Countries in International Merchandise Trade, Total Value as a % of GDP

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FDI and Competitive Advantage

Dr. Reham Elseidi
Ain Shams University, Business Administration Department
* Large, resourceful companies with substantial international operations are able to leverage FDI to:Manufacture/assemble products in low-cost labor countries, i.e. India, Russia, Brazil, China, and Mexico(many European &U.S. firms); Invest in western markets, even though they may originate from emerging economies themselves:■ Examples-India's Mittal Steel Co. acquired the Belgium-based Arcelor SA in August 2006, creating a $38 billion conglomerate -- the world's largest steel company. Russian oil and gas firm Lukos established thousands of service stations in the U.S. and Europe.

Dramatic Growth of FDI Since the 1980s

Dr. Reham Elseidi
Ain Shams University, Business Administration Department
* September 11, 2001 interrupted FDI inflows with the worldwide panic that ensued following the terrorist attacks in the United States. 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. The improved lives of billions are directly linked to world trade and investment.

Foreign Direct Investment (FDI) Inflows into World Regions (in Billions of U.S. Dollars per Year)

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Services as Well as Products
Key international players: Tangible merchandise (products) and intangibles (services- e.g. banks, consulting firms, hotels, airlines, construction companies, retailers, etc.). ■ International trade in services accounts for about one quarter of all global trade and is growing faster than products, however the value of merchandise trade is still much greater than the value of services trade. ■ Challenges unique to services:◘ Not all services can be exported.◘ Physical presence in host country is a prerequisite for many services.■ $2 trillion worth of services are sold abroad every year International Business: The New Realities
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Service Industries that are Rapidly Internationalizing

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International and Domestic Business: How They Differ

International business: is conducted across national borders; uses distinctive business methods; is in contact with countries that differ in terms of culture, language, political system, legal system, economic situation, infrastructure, and other factors. 2. When they venture abroad, firms encounter four major types of risk.

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The Four Risks of International Business

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The Four Risks of International Business

1-* The Four Risks of International Business

The Four Risks of International Business

1-* The Four Risks of International Business



The Four Risks of International Business

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The Four Types of Risks in IB
Cross-cultural risk: a situation or event where a cultural miscommunication puts some human value at stake Country risk or political: potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country Currency risk or financial: risk of adverse unexpected fluctuations in exchange rates. The value of one currency in terms of another Commercial risk: firms potential loss or failure from poorly developed or executed business strategies, tactics, or procedures
Ain Shams University, Business Administration Department
Dr. Reham Elseidi
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Cross-Cultural Risk

Cultural differences: Risks arise from differences in language, lifestyle, attitudes, customs, and religion, where a cultural miscommunication jeopardizes a culturally valued mindset or behavior. Negotiation patterns: Negotiations are required in many types of business transactions; e.g., Mexicans are friendly and emphasize social relations, whereas Americans areassertive and get down to business quickly.
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Cross-Cultural Risk (cont.)

Decision-making styles: Managers constantly make decisions about the operations and future direction of the firm. For example, Japanese take considerable time to make important decisions, whereas Canadians tend to be decisive and “shoot from the hip.”Ethical practices: Standards of right and wrong vary considerably around the world. For example, bribery is relatively acceptable in some countries in Africa, but is generally unacceptable in Sweden.
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Country Risk (Political Risk)

Government intervention, protectionism, and barriers to trade and investment Bureaucracy, red tape, administrative delays, corruption Lack of legal safeguards for intellectual property rights Legislation unfavorable to foreign firms Economic failures and mismanagement Social and political unrest and instability
ExamplesThe U.S. imposes high tariffs on imports of sugar and other agricultural products.Doing business in Russia often requires paying bribes to government officials.Venezuela’s government has interfered much with the operations of foreign firms.Argentina has suffered high inflation and other economic turmoil.
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Currency Risk (Financial Risk)
Currency exposure: General risk of unfavorable exchange rate fluctuations.Asset valuation: Risk that exchange rate fluctuations willadversely affect the value of the firm’s assets and liabilities.Foreign taxation: Income, sales, and other taxes vary widely worldwide, with implications for company performance and profitability.Inflation: High inflation, common in many countries, complicates business planning and the pricing of inputs and finished goods. 1-* Examples The Indian rupee has fluctuated a lot since 1990. The U.S. has relatively high corporate income taxes. Brazil and Russia have experienced very high inflation.

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Commercial Risk
Weak partnerOperational problemsTiming of entryCompetitive intensityPoor execution of strategyGeneral commercial risks such as these lead to sub-optimal formulation and implementation of the firm’s international value-chain activities.
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The Four Risks of IB: Conclusion

These risks are always present, but manageable. Managers need to understand, anticipate, and take proactive action to reduce their effects. Some risks are extremely challenging.

Example The recent global financial crisis generated many commercial, currency, and country risks, affecting banks and other firms worldwide, and leading to steep declines in national stock markets and normal business activity.

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Who Participates in International Business?
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Multinational Enterprise, Corporation or Trans national Co-operation (MNE, MNC or TNC)

A large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries. In addition to a home office, an MNE owns a worldwide network of subsidiaries. Examples- Caterpillar, Kodak, Nokia, Samsung, Unilever, Citibank, Vodafone, Carrefour, Bechtel, Four Seasons Hotels, Disney, DHL, & Nippon Life Insurance. The most well known MNEs are ranked, based on international sales revenue, in annual listings such as Fortune magazine’s Global 500. * Ain Shams University, Business Administration Department
Dr. Reham Elseidi

Examples of Fortune’s Global 500 Dr. Reham Elseidi

Ain Shams University, Business Administration Department
* Wal-Mart
General Motors
Exxon Mobil
Toyota
Royal Dutch Shell
Ford
BP
Renault-Nissan
Total
Conoco Philips

Geographic Location of Multinational Enterprises, 2006

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Small and Medium-Sized Enterprise

A company with 500 or fewer employees in the United States, although this number may need to be adjusted downward for other countries. Small firms comprise 90 - 95 percent of all firms in most economies. Increasingly more SMEs participate in exporting, licensing, and global sourcing. Small firms are the drivers for innovation. Account for one-third of exports from Asia; a quarter of the exports from the affluent countries in Europe and North America Contribute more than 50 percent of total national exports in Italy, South Korea, and China.
Ain Shams University, Business Administration Department
Dr. Reham Elseidi
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Born Global Firm
Born global firm: a young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets. SMEs: Are often more innovative, adaptable, and have quicker response. Are better able to serve niche markets. Can better leverage the Internet. Due to limited resources, tend to minimize fixed costs and outsource. Tend to flourish on private knowledge that they cultivate through their knowledge networks and international social capital.
Ain Shams University, Business Administration Department
Dr. Reham Elseidi
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Non-governmental Organizations (NGOs)

They serve special causes, the arts, education, politics, religion and research. Examples: Bill and Melinda Gates Foundation CARE- dedicated to reducing poverty British Wellcome Trust- supports health and education
Ain Shams University, Business Administration Department
Dr. Reham Elseidi
*

Geographic Locations of the500 Largest Multinational Enterprises

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Non-governmental Organizations

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Why do Firms Participate in IB?

To seek opportunities for growth through market diversification E.g., Harley-Davidson, Sony, Whirlpool. To earn higher margins and profits Often, foreign markets are more profitable. To gain new ideas about products, services, and business methods E.g., GM refined its knowledge about making small, fuel-efficient cars in Europe.


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Why do Firms Participate in IB? (cont.)

To better serve key customers that have relocated abroad E.g., when Toyota launched its operations in Britain, many of its suppliers followed suit. To be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products E.g., Dell sources parts and components from the best suppliers worldwide.

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Why do Firms Participate in IB? (cont.)
To gain access to lower-cost or better-value factors of production E.g., Sony does much of its manufacturing in China. To develop economies of scale in sourcing, production, marketing, and R&D E.g., Boeing lowers its overall costs by sourcing, manufacturing, and selling aircraft worldwide.

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Why do Firms Participate in IB? (cont.)
To confront international competitors more effectively or to thwart the growth of competition in the home market Chinese appliance maker Haier established operations in the United States, partly to gain competitive knowledge about Whirlpool, its chief US rival. To invest in a potentially rewarding relationship with a foreign partner French computer firm Groupe Bull partnered with Toshiba in Japan to gain insights for developing information technology.

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Why Should You Study IB?
To facilitate the global economy and interconnectedness. IB brings nations closer together. To contribute to national economic well-being. IB fuels economic growth and rising living standards. To provide a competitive advantage for the firm. IB provides companies with many benefits, leading to profitability and competitive advantages.

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Why Should You Study IB? (cont.)
To gain a competitive advantage for yourself. Working internationally offers a range of enlightening experiences, new knowledge, and other benefits that enhance careers…and it’s exciting!To provide an opportunity for global corporate citizenship. Firms must be ethical and socially responsible in their dealings because IB affects numerous constituents, often in unintended ways.
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Recent Grad in IB: Ashley Lumb

Ashley is a real person, who got her undergraduate degree from a state university a few years ago. Read her profile in Chapter 1.Ashley’s majors: Marketing and International businessReasons for pursuing career in international business: Adventure, perspective, career growth, and the opportunity to learn foreign languagesAshley’s jobs since college:Marketing Representative in Nice, FranceAccount Representative in Monte CarloMarketing Associate in Rome, ItalyMarketing Manager at Italian Vogue magazine
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Recent Grad in IB: Ashley Lumb (cont.)

Ashley’s Success FactorsHard work and networking.Ashley made a strong effort to meet lots of people. She sent out many resumes, asked a lot of questions, and researched job markets that interested her. To keep afloat between assignments, she worked several “unglamorous” jobs.ChallengesWorking abroad means stepping outside your comfort zone.IB may require following a career path that is nontraditional or not clearly defined .Language and culture barriers are always present.
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