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ADMS 3960 IB Notes Ch Globalization and International Business the integration of world economies through the elimination of barriers to movements of goods, services, capital, technology and people How Does International Business Fit In? enables us to get more variety, better quality, lower prices a...

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ADMS 3960 IB Notes Ch 1- Globalization and International Business Globalization- the integration of world economies through the elimination of barriers to movements of goods, services, capital, technology and people How Does International Business Fit In? -globalization enables us to get more variety, better quality, lower prices IB- all commercial transactions that take place between 2+ countries -goal of private business is to make profits -government business may or may not be motivated by profit Study of IB -managers need to consider where to obtain the inputs needed of the required quality at the best price -and also where they can best sell the product Understanding the Environment/Operations Relationship -companies operating internationally have more diverse and complex operating environments than those at home due to cultures and values Forces Driving Globalization -import restrictions have been decreasing, and output from foreign-owned investments as a percentage of world production has increased -world trade has grown more rapidly than world production -only a few counties sell over half their production abroad/ depend on foreign output for their cnsmp’n -the Foreign Policy Globalization Index ranks countries across four dimensions: Economicint’l trade and investment TechnologicalInternect connectivity Personal contactint’l travel/ tourism, int’l telephone traffic, personal transfers of funds abroad Politicalparticipation in int’l orgs and gov monetary transfers Factors in Increased Globalization Increase in and the application of technology -advances in technology in many dff countries -is due to population growth, economic growth, freeing up more people to develop new products -innovations in transportation mean more countries can compete for sales to any market -it can speed up interactions, enhance a manager’s ability to oversee foreign operations Liberalization of Cross-Border Trade and Resource Movements -over time, most governments have reduced restrictions for three main reasons: -citizens want a greater variety of goods -competition spurs domestic producers to become more efficient -they hope other countries will reduce barriers as well Development of Services that Support Int’l Business -bank credit agreements, clearing arrangements that convert one currency into another Growing Consumer Pressures

-we want more, newer, better products that are also differentiated from others -it has spurred companies to spend more on R&D for innovations Greater Global Competition -present pressures can persuade companies to buy/sell abroad -a firm might introduce products in markets where competitors are already gaining sales Born-global companies- start out with a global focus because of their founders’ int’l experience -many new companies locate in areas with numerous competitors and suppliers (clustering) Changing Political Situations -end of communist countries and the rest of the world -willingness of governments to support programs to foster speed and cost efficiencies -help domestic companies sell abroad more Expanded Cross-National Cooperation -govs have recognized their interests can be addressed through treaties, agreements, consultation Pursuing these policies is due to the three needs: Gain reciprocal advantagesgovs join orgs for a variety of commercial activities -allows the countries’ commercial ships & planes to use certain seaports for reciprocal port use Multinational problem solvingthe resources needed to solve issue may be too big for one to handle -one country’s policies may also affect those of others (Eg. Interest rate) Areas outside national territoriesnobody owns the oceans, outerspace or Antarctica -agreements are needed to specify the amounts and rights of taking those resources Costs of Globalization -antiglobalization can sometimes lead to protests and violent lashes Threats to National Sovereignty Sovereignty- freedom to act locally and without externally imposed restrictions Local Objectives and Policies -countries fulfill their citizens’ objectives by setting rules reflecting national priorities -some argue that countries’ priorities are undermined by opening borders to trade Small Economies’ Overdependence -small economics depend so much on larger ones for supplies and sales -int’l companies are powerful enough to dictate their operating terms Cultural Homogeneity - of products, co’s, work methods, social structures, language -it is harder to maintain the traditional ways of life Economic Growth and Environmental Stress Argument for Global Growth and Global Cooperation -some argue globalization has positive results; it fosters uniform standards for combating environmental problems so everybody can act together -sustaining economic growth will continue to be a problem in the future though Growing Income Inequality and Personal Stress Income Inequality

-global superstar system, creating access to a greater supply of low-cost labour -in sports where stars earn more than other professionals in sports -profits have disproportionately gone to the top execs -the challenge is to maximize the gains from globalization while minimizing the costs by the losers Personal Stress -some are stressed from social status suffers, and those who fear the loss of their jobs Why Companies Engage in IB Expanding Sales -higher sales create value only if the costs of making the add’l sales don’t increase disproportionately -increased sales are a major motive for expanding into int’l markets Acquiring Resources -distributors seek out products from foreign countries because domestic supplies are inadequate -they look for anything that will create a competitive advantage, by improving the quality of their product of by differentiating it Reducing Risk -operating in countries with diff business cycles can minimize swings in sales -by obtaining products domestically and internationally,companies can soften the impact of price swings Modes of Operations in IB Merchandise Imports and Exports Merchandise imports- goods brought into a country Merchandise exports- tangible goods sent out of a country Service Imports and Exports Service import-recipient and payer of payment Service export- provider and receiver of payment -service exports take many forms: Tourism and Transportationairlines, shipping companies, travel agencies, hotels Service Performance performance of those services Turnkey operations- construction projects done under contract &transferred to owners when completed Management contracts- one company provides personnel to perform management fnctions for another Asset useLicensing agreements-when a company allows another to use its assets Royalties- earnings that are received Franchising- when one party allows another to use a trademark as an asset of the franchisee’s business Investments -dividends and interest paid represent the use of assets Direct InvestmentFDI- investor takes a controlling interest in a foreign company Joint venture- when 2+ companies share ownership of an FDI Portfolio InvestmentDef’n- financial interest in another entity -is either through stock in a company, or loans to a company in bonds, bills, or notes

Types of International Organizations Collaborative arrangements- companies who work together Strategic alliance- an agreement that doesn’t involve joint ownership Multinational enterprise (MNE)- company with FDI; also called MNCompany Why IB Differs from Domestic Business Physical and Social Factors Geographic Influences -location, quantity, quality and availability of the world’s resources, and ways to exploit them -since smaller countries have less access to domestic resources, they’re usually more dependent on international trade than larger countries -geographic barriers like mountains and deserts affect communications and distribution channels -chance of natural disasters can make business riskier Political Policies -influences how IB takes place within its borders -political disputes can disrupt trade and investment (eg. Terrorist bombing) Legal Policies -domestic law includes regulations on taxation, employment, foreign-exchange transactions -international law determines how earnings area taxed by all jurisdictions -may also determine how companies can operate in certain places -it can affect a firm’s foreign operations Behavioral Factors -different values, attitudes, beliefs -can help managers make operational decisions abroad Economic Forces -why countries exchange goods and services, why capital and people travel among countries -helps explain why some countries can produce goods for less The Competitive Environment Competitive Strategy for Products -products compete by cost or differentiation; differentiation by: -favorable brand image through advertising -unique characteristics -mass-market or selling to a niche market -different strategies may be used for different products Company Resources and Experience -a company’s size and resources compared to those of its competitors -companies have to invest more resources to secure national distribution than in small markets -they face more competitors in large markets -a company with a dominant market position uses operating tactics differently from one who’s new Competitors Faced in Each Market

-success in a market depends on whether the competition is also international, or local -what they learn about each other in one country is useful in predicting the other’s strategies elsewhere Ch 6- International Trade and Factor-Mobility Theory Laissez-Faire vs. Interventionist Approaches to Exports and Imports -policies influence which countries can produce given products more efficiently and whether countries will permit imports to compete against domestically produced goods -with the laissez faire approach, it allows market forces to determine trading relations -in free trade theories, the gov shouldn’t intervene -mercantilism and neomercantilism are the opposite extreme; prescribing government intervention Interventionist Theories Mercantilism Def’n- theory that states countries should export more than they import Governmental Policies -for this to happen, govs restricted imports and subsidized production -some countries used their colonies to support this trade objective by having them supply commodities that they’d otherwise have to buy from a nonassociated country as mercantilism weakened after 1800, home based companies had technological leadership, ownership of resources abroad, and also protection from foreign competition; which continued to make colonies tie their trade to their mother country Concept of Balance of Trade Trade surplus- when a country exports more than it imports Trade deficit- when a country imports more than it exports -during mercantilism, the difference was made up by a transfer of gold; today it is granting credit Neomercantilism Def’n- the approach of countries that try to run favorable balances of trade to achieve some social or political objective Free-Trade Theories -holds that nations shouldn’t limit imports, nor promote exports -markets will determine which producers survive based on specialization Theory of Absolute Advantage (Adam Smith) Def’n- holds that diff countries produce some goods more efficiently than others, and because of this, citizens can buy them abroad rather than domestically since it costs less Through specialization, it can increase efficiency for three reasons: -labour could become more skilled -labour wouldn’t lose time in switching production -it would give incentives for developing more effective working methods Natural advantage- comes from climatic conditions, access to certain resources and labour force -can help explain where certain manufactured items might be best produced

Acquired Advantage Def’n- consists of either product or process technology adv of product technology  enables a country to produce a product that is easily distinguished from those of competitors adv of process technologycountry’s ability to efficiently produce a homogenous product -acquired advantage through tech has created new products and also changed trading-partner r/ns Resource Efficiency -specialization increases the production of both products -global efficiency is optimized, and countries can have more than they would without trade Theory of Comparative Advantage (David Ricardo) Def’n- global efficiency gains can still result if a country specializes in what it can produce most efficiently, regardless of whether other countries can produce the same prods more efficiently -a country can have C.A in both goods, whereas A.A is just one -a country gains if it concentrates its resources on the commodities it can produce most efficiently Theories of Specialization: Some Assumptions and Limitations -the theories make assumptions that aren’t always correct Full employment both assume that resources are fully employed; when countries have many unemployed resources, they might begin to restrict imports Economic efficiencycountries also pursue objectives other than output efficiency; they might avoid overspecialization because of the vulnerability by changes in technology -countries’ goals may not be limited to economic efficiency Division of gainsif they perceive a trading partner is gaining too large a share of benefits, they may prefer to forgo absolute gains to prevent others from gaining an economic adv Two countries, two commoditiesthe same theory can be applied to multiproduct and multicountry trade relationships to show the efficiency adv Transport costsas long as the diversion reduces output by less than what the two countries gain, there are still gains from trade Statics and dynamicsmost trade today is due to acquired adv; technical dynamics cause countries to gain or lose both absolutely and relatively Servicestheories apply because resources must also go into the service production -offering education to foreign countries, credit card systems Production networkscosts are saved by having activities take place in countries where there is an absolute or comparative adv for their production Mobilitythe theories assume resources can move domestically from the production of one good to another at no cost, but it’s not all true Eg. steelworkers don’t easily move into software jobs due to diff skills -it also assumes the resources can’t move internationally Trade Pattern Theories How Much Does a Country Trade?

Nontradable goods- products that are rarely practical to export because of high transportation costs are produced in every country Theory of Country Size Def’n- large countries usually depend less on trade than small ones -varied climates and different natural resources make large countries more self sufficient -distance to foreign markets affects large and small countries differently -the farther the distance, the higher the cost, and the greater the uncertainty Size of the Economy -developed countries produce so much that they have more to sell, and because they have so much to sell, incomes are often higher and people can buy more from domestic/foreign sources What Types of Products Does a Country Trade Factor Proportions Theory Def’n- differences in countries’ funding of labour compared to land explains the differences in the cost of production factors People and Landcountries that have many ppl have high land price because it’s so limited Manufacturing Locationsmost successful industries in small countries are those that uses the least amount of land relative to the number of people employed Capital, Labour Rates, Specializationin countries with little capital for investment, managers might find cheap labour rates and export competitiveness in products that need large amounts of labour -labour skills vary among countries because of training and education differences -a company may locate its R&D in countries with a highly educated population Process Technologybecomes more complicated when the same product can be created by different methods, such as with labour or capital -companies may substitute capital for labour, depending on its costs -cos may locate long production runs in small countries if they expect to export from them -bigger countries depend more on products requiring longer production runs Product Technologytechnology depends on high educated people and a large amount of capital to invest in R&D With Whom Do Countries Trade Country-Similarity Theory Def’n- companies create new products in response to market conditions in their home market -they turn to markets they see as most similar to what they’re accustomed to -dev’ped countries trade with each other because they produce and consume more -emphasize technical breakthroughs -produce differentiated products and services Specialization and acquired advto export, a company must provide consumers abroad with an adv over what they could buy from their domestic producers -trade occurs because countries specialize to gain acquired adv Product differentiationcompanies differentiate products, creating two-way trade in similar products Effects of cultural similarityit is easier to do business in countries perceived as similar to home

-is easier to continue business ties than to develop new arrangements Effects of political r/n and economic agreementspolitical r/n and agreements among countries can discourage or encourage trade between tem Effects of distancegeographic distance between two countries; big distance = big transportation cost Overcoming distancemethods to overcome distance drawbacks are difficult to maintain -they can sell the good to a country, but the transportation costs are really high Statics and Dynamics of Trade Product Life Cycle (PLC) Theory Def’n- the production location for mayn products moves from one country to another as they go through their life cycle; consists of four stages: Changes Over the Cycle -companies develop new products because they see needs for them Introductioninnovation, exporting by the country that’s innovating it, dvpmt of prod traits Growthincrease in exports, more competition, increased capital intensity, some foreign production Maturitydecline in exports, more product standardization, more capital intensity, increased competitiveness of price, production start ups in emerging economies Decline- concentration of production in developing countries, country now becomes an importer Verification and Limitations of PLC Theory -many products where locations usually don’t shift: -products with high transport costs, with short life cycles (some fashion) -luxury products for which cost is of little concern to the consumer -products for which a company can use a differentiation strategy to maintain consumer demand without competing on the basis of price -products that require specialized technical labour near the production Diamond of National Competitive Advantage Def’n- theory showing four important features for competitive superiority: -all four need to be favourable for an industry to maintain global supremacy Demand Conditions new products arise from companies’ observation of need or demand Factor Conditionscan influence choice of product to the choice of country; production factors Related and supporting industriesimportance of transport costs in the theory of country size Firm strategy, structure, rivalryability of the cos to develop and sustain a C.A; barriers to entry Limitations of the Diamond of National Advantage Theory -it doesn’t guarantee an industry will develop in a given locale -resource limitations may cause a country’s firms to avoid competing, despite an A.A -growth of globalization; foreign/demand conditions have spurred much of the Asian export growth -companies may depend on foreign locations for portions of their production -materials and components are more easily brought in from abroad -prior domestic absence of any of the four conditions may not hinder companies from gaining these conditions and becoming globally competitive

Factor-Mobility Theory Def’n- the mobility of capital, technology and people affect trade and relative competitive positios Why Production Factors Move Capital -most mobile production factor -companies transfer capital because of differences in expected return (accounting for risk) -ST capital is more mobile than LG -businesses don’t make all int’l capital mo...