Class 1 (Entry Modes) Flashcards
what is globalization?
The widening set of interdependent relationships
among people from different parts of a world that is
divided into nations
in which directions can a firm grow?
Vertically : Value Chain
Horizontally: Products/Services
Geographically: Location
plus they can “grow the core”
how can you grow?
Organic
Joint Venture/Partnership
Merger/Acquisition
flat vs spiky world?
World is Flat Thomas Friedman, 2005 • World is flattening & shrinking due to the web & internet • Flattening increases opportunity & intensifies global competition • Lower logistic costs ⇒ ↑ global value chains
World is spiky Richard Florida, 2005 • Economic landscape has steep peaks & valleys • Uneven distribution of innovation • Clusters matter – Uneven growth & opportunity • Uneven distribution of population – shown by uneven luminosity seen from space – urban – rural disparity
what are the 7 forces driving globalization?
- Increase in and application of technology
- Liberalization of cross-border trade and resource
movements - Development of services that support international
business - Growth of consumer pressures
- Increased global competition
- Changing political situations and government policies
- Expanded cross-national cooperation
what are potential costs of globalization?
• Threats to national sovereignty
– lose freedom to “act locally”
• Economic growth and environmental stress
– growth consumes nonrenewable natural resources and
increases environmental damage
• Growing income inequality and personal stress
– promotes global superstars at the expense of others
define offshoring
a type of outsourcing, involves the
transferring of production abroad
– it can be beneficial because it reduces costs
– but, it also means that jobs move abroad
what are 3 reasons that companies engage in international business?
- To expand sales
– pursuing international sales increases the potential market and potential profits - To acquire resources
– may give companies lower costs, new and better products, and additional operating knowledge - To diversify or reduce risks
– international operations may reduce operating risk by
smoothing sales and profits, preventing competitors from gaining advantage
what are three major perspectives on the future of int. business and globalization
– Further globalization is inevitable
– International business will grow primarily along regional rather than
global lines
– Forces working against further globalization and international
business will slow down both trends
what is CAGE distance?
Cultural
Administrative –> laws, legal systems, politics,etc.
Geographic
Economic–> human and natural resources, income, investment, etc
how does geographic distance affect int. business?
– Distance, time zones,travel time
– Affects transportation, communication & coordination costs
how does economic distance affect int. business?
– Economic development level, consumption level, relative size of economy
– Indicators: GDP, GDP growth, GDP/capita, Human Development
Index
– Affects purchasing power, market size, wage levels /
labour cost, market attractiveness
• Purchasing power varies between
(& within) countries
– challenge to design product/service for sale in a country with lower purchasing power than home
country
⇒ high distance is disadvantage
• Wages vary between countries
– firm can lower costs by offshoring activities to country with wages below home country
⇒ high distance is an advantage
• Natural resources are present in some locations and not others
• Talent is concentrated in some locations
• Transportation costs are not uniform even within a
country
• Communications & coordination costs rise with global operations
what are potential advantages of multi-national firms? (7)
- Superior technical know-how
• Exa: Technology, marketing, resource extraction - Ability to leverage existing reputation, brand image, goodwill
- Large size & scale economies
• Increases bargaining power
• Scale helps cover high fixed costs in capital intensive industries
• Lower input costs due to scale
• Logistics, distribution & promotion scale economies
• Lower financing costs and lower credit risk - Managerial experience & expertise
- Ability to locate activities elsewhere
• Sourcing raw materials
• Locating production facilities
• Financial flexibility transfer pricing
• Tax planning (& “tax inversion”) - Information advantages
- Risk diversification across countries
what are potential disadvantages of multinational corporations? (7)
- Business risks: FX risk (which may be hedged)
- Host-country regulations
- Different legal systems
- Political risks – major regulatory shift may be greater risk
than nationalization, war etc. - Operational difficulties e.g. adapting to local business
practices - Cultural differences
- Coordination costs…
what are examples of non-equity entry mode choices?
Exporting • Licensing • Franchising • Management contract • Turnkey operation • Strategic alliances (sometimes lead to acquisition)
