International Business Chapter 1,2,3, and 5 (EXAM) Flashcards
6 Dimensions of International Business
- Globalization of Markets
- International Trade
- International Investment
- International Business Risks
- Participants
- Foreign Market Entry Strategies
Globalization of Markets: Globalization
The intense economic, political, and personal interconnectedness among countries, companies, and consumers
Globalization of Markets: International Business
Performance of trade and investment activities by FIRMS across national borders
Globalization of Markets
Ongoing economic integration and growing interdependency of countries worldwide
International Trade
Exchange of products and services across national borders; typically through exporting and importing
International Trade: Exporting
Sale of products or services to customers located abroad, from the base in the home country or a third country (Boeing and airbus)
International trade: 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 from China when it manufactures in Japan)
International Investment
Transfer of assets to another country or the acquisition of assets in that country (AKA FOREIGN DIRECT INVESTMENT [FDI])
International Investment: International Portfolio Investment
Passive ownership of foreign securities such as stocks and bonds in order to generate financial returns
International Business Risks (4 major types of risks)
- Cross Cultural
- Country Risk
- Currency (financial) risk
- Commercial Risk
How does international business differ from domestic business
- 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
Cross cultural risk
Cultural differences
Negotiation patterns
Decision-making styles
Ethical policies
Country Risk
Government- intervention, protectionism, and barriers to trade and investment (Help business in own country)
Bureaucracy- red tape, administrative delays, corruption
Legal limitations- lack of legal safeguards for intellectual property rights, legislation unfavorable to foreign firms
Economy- economic failures and mismanagement
Social and political unrest- instability
Currency Risk
Currency exposure- general risk of unfavorable rate fluctuations
Asset valuation- risk that exchange rate fluctuations will adversely affect the firms assets and liabilities
Foreign taxation- income, sales, and other taxes vary worldwide
Inflation- high inflation complicates business planning and pricing of inputs and finished goods
Commercial risk (THE FIRM)
Weak partner
Operational problems
Timing of Entry
Competitive intensity
Poor execution of strategy
Participants
Multinational Enterprise (MNE)- large company
Small/medium-sized enterprises (SME)- over 90% of all firms in most countries, 500 or fewer
Born global firm: A young entrepreneurial SME that undertakes substantial international business at or near its founding (short period of time)
Non governmental organizations
Foreign Market entry strategies
(why firms internationalize)
- seek opportunities for growth
- Earn higher margins and profits
- Gain new ideas about products, business methods
- serve key customers (derived demand)
- Be closer to suppliers
- Gain access to lower cost or better value factors of production
- Develop economies of scale
- Confront international competitors
- Invest in a potentially rewarding relationship with a foreign partner
Phases of globalization: Phase one
Rise of manufacturing: cross-border trade commodities, largely by trading companies
Phases of globalization: Phase two
Electricity and steel production
Emergence and dominance of early MNE’s manufacturing, extractive, and agricultural industries
Phases of globalization: phase three
Formation of General Agreement on tariff and Trade, conclusion of World War 2, Marshal Plan to reconstruct Europe
focus by industrializing western countries to reduce trade barriers, rise of MNEs from Japan, development of global capital markets, rise of global trade names
Phases of globalization: phase four
Privatization of state enterprises in transition economies, revolution in information, communication and transportation technologies; remarkable growth of emerging markets, former communist countries opening up to the world buying products
rapid growth in cross border trade of products, services, and capital, rise of internationally active SMEs and services firms, rising prosperity of emerging markets
Phases of globalization: phase five
rise of digital technologies, and other new technologies, which are boosting manufacturing productivity and the efficiency of international trade in services
leveraging technology to facilitate trade and local production, rising trade in digitally enables services but slowing growth of trade in merchandised goods
Globalization framework (4 key components)
- drivers
- dimensions (characteristics)
- Firm-level consequences
- Societal consequences
Drivers
reduction of barriers
transition to market-based economies (market liberalization/free trade)
industrialization
integration of world financial markets
advances in technology
Advances in technology
> easier communication and collaboration
low scale and low cost manufacturing
Better and cheaper transportation
2 bins:
< IT
< Digitization
I.T.
Science and process of creating and using info resources
Digitization
enabling or transforming business functions, operations, or activities by leveraging digital tech. or digitization of data
Dimensions (characteristics)
> Integration or interdependence of economies
Rise of regional economic integration blocs (ex: NAFTA)
Growth in global investment
convergence of buyer lifestyles allowing for standardized products
Globalization of production activities and services (Nike outsourcing from China)
Firm Level consequences
a purely domestic focus is no longer possible
>opportunities to internationalize firms value chain and realize international business benefits (cost savings, better value chain activities, access customers, labor, input, or technology, benefit from foreign partner capabilities)<
Value chain
Sequence of value adding activities the firm performs while it goes through the process of developing, producing, marketing, and servicing a product
research and development –> Sourcing/procurement–> manufacturing –>Marketing –> distribution –> sales and service
offshoring
own it but not in the country
Societal consequences
Contagion
Loss of national sovereignty
offshoring and the flight of jobs
impact on the poor
impact on natural environment
impact on national culture
contagion
rapid spread of crises in one country to another
Essential Elements of culture (6 reasons)
- Cross- cultural risk
- dimensions of culture
- language
- religion
- models of culture
- cultural competency
Cross cultural risk
a situation or event where a cultural miscommunication puts some human value at stake. it arises in environments comprised of unfamiliar languages and unique values, beliefs, and behaviors:
cultural differences
negotiation patterns
decision making styles
ethical practices
culture
values, beliefs, customs, arts, and other products of human thought and work that characterize the people of a given society
socialization
learning rules and behavior for a given society
acculturation
adjusting and adapting to a culture other than your own
dimensions of culture
Iceberg:
High culture- art, drama, literature, classical music (visible)
folk culture- humor, religion, cooking, dress, etc. (aware of/ seen)
deep culture- greeting rituals, gender roles, family relationships, concepts of beauty, etc. (Unaware of/unseen)
Dimensions
> values
attitudes
manners and customs
perceptions of space
symbolic and material productions (ex: flag)
education
social structure
Language
Verbal language:
-translation
-idioms
-jargon (terms embedded in culture)
Nonverbal language:
- facial expressions, hand gestures, eye contact, posture, etc.
Religion
a system of common beliefs or attitudes regarding a being or system of thought that people consider sacred, divine, or the highest truth; and the associated moral values, traditions, and rituals
Religions: Christianity, Islam, Hinduism, Buddhism
Models of cultures
Hofstede study (things are on a spectrum):
> high and low context
>individualism and collectivism
> power distance
> uncertainty avoidance
> masculinity and femininity
> long term vs short term
> deal versus relationship orientation
Cultural competency
Cultural levels: National, professional, corporate
Cultural orientation:
>ethnocentric- home country mindset
> polycentric- love host country
> geocentric- enjoy all country culture
Building your cultural intelligence (CQ)
three guidelines:
1. acquire factual knowledge about the other culture and try to speak the language
2. avoid cultural bias
>self reference criterion
> critical incident analysis
3. develop cross cultural skills
>tolerance for ambiguity, perceptiveness, valuing personal relationships, and flexibility and adaptability
Comparative Advantage
superior features of a nation that provide unique benefits in global competition. COUNTRY-SPECIFIC ADVANTAGE
Competitive advantage
Assets or capabilities of a firm that are difficult for competitors to imitate allowing for above average profits to be generated. FIRM SPECIFIC ADVANTAGE
Why do NATIONS trade (6 classical theories)
- mercantilism
- absolute advantage principal
- Comparative advantage principal
- factor proportions theory and leontief paradox
- International product life cycle theory
- New trade theory
Mercantilism
A belief in the 16th century that national prosperity results from maximizing exports and minimizing imports
neo mercantilism- the nation should run a trade surplus
harms importers and consumers
Free trade
The absence of restrictions to the flow of goods and services among nations (PHASE III)
leads to:
>more and better choices for consumers and firms
>lower prices for consumers and firms
> higher profits and better work wages
> higher living standards for consumers (costs are lower)
> Greater prosperity in poor countries
absolute advantage principal
a country should produce only those products in which it has absolute advantage or can produce using fewer resources than another country
Comparative advantage
foundation concept of international trade:
beneficial for two countries to trade even if one had absolute advantage in the production of all products; what matters is not the absolute cost of production but the relative efficiency with which it can produce the product
Factors of production (land, labor, capital)
AKA factor endowments theory; argues that each country should produce and export products that intensively use relatively abundant factors of production, and import goods that intensively use relatively scarce factors of production
Leontief paradox
countries can successfully export products that use less abundant resources (Ex: US exports labor-intensive goods)
Implies international trade is complex and cannot be explained by a single theory
International product life cycle
Each product and its associated manufacturing technologies go through three stages of evolution: Introduction, Maturity, and standardization
Introductory stage
inventor country enjoys a monopoly both in manufacturing and exports
Maturity stage
the product’s manufacturing becomes relatively standardized and other countries start producing and exporting the product
standardization stage
manufacturing ceases in the original innovator country, and it becomes a net importer of the product
new trade theory
Argues that economies of scale are an important factor in some industries for superior international performance, even in the absence superior comparative advantages
How can nations enhance their competitive advantage?
- Competitive advantage
>determinants of national competitiveness - National industrial policy
>practices
Comparative advantage + Competitive advantage = National competitiveness
Michael porter’s diamond model
top: Firm strategy, structure, and rivalry
Right: Demand conditions
Bottom: related and supporting industries
Left: Factor conditions
National industrial policy
a proactive economic development plan employed by the government to nurture or support promising industry sectors with potential for regional or global dominance
Initiatives:
> tax incentives
> monetary and fiscal policies
> rigorous educational system
> investment in national infrastructure
> strong legal and regulatory systems
Why and how do firms internationalize?
Stages in company internationalization:
1. domestic focus
2. pre-export stage
3. experimental involvement
4. active involvement
5. committed involvement
Modes of entry
look at worksheet
How can internationalizing firms gain and sustain competitive advantage
MNE focused:
> FDI
-monopolistic advantage theory
-internationalization theory
-dunnings eclectic paradigm
>Non FDI explanations
-international collaborative ventures
+equity-based joint ventures
+ project- based alliances
Globalization pros and cons (firm/society)
Firm Pro: new markets, standardization of product, cost savings, economies of scale, benefits of having foreign partners
Firm Con: increased competition, increased complexity
Society Pro: advancements in technology, interconnectedness (ease of access to products), interdependence, better standard of living
Society Con: loss of domestic jobs, offshoring, contagion, deculturalization
