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The Challenging Context of International Business

Module 1

No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Because learning changes everything.®

Learning Objectives

1-1 Show how international business differs from domestic business.

1-2 Describe the history and future of international business.

1-3 Discuss the dramatic internationalization of business.

1-4 Identify the kinds of drivers that are leading firms to internationalize their operations.

1-5 Compare the key arguments for and against the globalization of business.

International Experience Can Help You Get a Job

International experience is valuable not only for new hires, but also for mid-career individuals who aspire to higher positions and greater responsibility. For developing international skills, CEOs believe that a number of courses in the international business curriculum are relevant to their companies. Foreign experience reflects independence, resourcefulness, and entrepreneurship.

Throughout this book you will find examples of ways to develop, apply, and promote your international skills and experience.

What Is International Business and What Is Different about It? 1

International Business

Business that is carried out across national borders.

A Starbucks coffee store in Beijing, China. Company executives say China is the coffee chain’s No. 1 growth market.

©Frederic J. Brown/AFP/Getty Images

What Is International Business and What Is Different about It? 2

Foreign Business

Denotes the operations of a company outside its home or domestic market.

International Company

A company with operations in multiple nations.

What Is International Business and What Is Different about It? 3

The Influence of External and Internal Environmental Forces

Environment: all of the forces influencing the life and development of the firm.

Uncontrollable forces: external forces that management has no direct control over.

What Is International Business and What Is Different about It? 4

The Influence of External and Internal Environmental Forces continued

External forces consist of the following:

Competitive

Distributive

Economic

Socioeconomic

Financial

Legal

Physical

Political

Sociocultural

Labor

Technological

What Is International Business and What Is Different about It? 5

The Influence of External and Internal Environmental Forces continued

Controllable forces

Internal forces that management administers to adapt changes in the uncontrollable forces.

Changes in an external force, such as the political force associated with the UK voting to leave the European Union (EU), can affect all controllable forces of firms that do business with or in the EU nations.

Critical Thinking Question

Give examples to show how an international business manager might manipulate one of the controllable forces in answer to a change in the uncontrollable forces.

Students will come up with any number of examples such as:

If a law is passed limiting the number of foreigners who may be employed in the firm (legal force), management will have to make the appropriate changes in the company’s personnel (controllable force).

If a new highway is built (physical force), the manager may have to make changes in the firm’s physical distribution system (controllable force) to reach the new market created by the highway.

What Is International Business and What Is Different about It? 6

The Domestic Environment

All the uncontrollable forces originating in the home country that surround and influence the life and development of the firm.

What Is International Business and What Is Different about It? 7

The Foreign Environment

All the uncontrollable forces originating outside the home country that surround and influence the firm.

Forces in the foreign environment operate differently than forces in the domestic environment for many reasons:

Forces have different values.

Forces can be difficult to access.

Forces are interrelated.

What Is International Business and What Is Different about It? 8

The International Environment

Includes interactions between domestic and foreign environmental forces and between the foreign environmental forces of two countries.

Global Debate

Professor C.K. Prahalad popularized the term “Bottom of the Pyramid” to refer to the approximately 3 billion people who survive on less than $2 per day, where basic survival needs are just barely met. Prahalad suggested that this large mass of humanity should be viewed as having tremendous market potential with untapped purchasing power.

If customers at the base of the pyramid could be convinced to allocate some of their meager income to products such as cigarettes, alcoholic beverages, or cosmetics, would it be socially responsible for multinationals to pursue such opportunities? Why or why not?

This question raises an issue that almost always generates strong opinions and a variety of perspectives. Some students may feel that these products are luxuries for people at the base of the pyramid, or perhaps that they are fundamentally undesirable products not only for the base of the pyramid but perhaps for all humans. The potentially addictive nature of products such as cigarettes and alcohol raises additional concerns, from a social responsibility standpoint, since it can exploit inherited or other tendencies to become reliant on such substances. Other students will often raise the notion of allowing people to make their own choices about what represents the best options for them to spend their meager resources, and that effort to discourage or regulate such commercial efforts is inappropriate. Exploring the variety of perspectives and allowing the debate to blossom can yield a rich and insightful learning experience for the participants.

What Is International Business and What Is Different about It? 9

The International Environment continued

Decision making is more complex in the international market.

Managers in a home office overseeing subsidiaries in 10 different nations must not only consider domestic forces but also the influence of 10 foreign national environments, both individually and collectively.

What Is International Business and What Is Different about It? 10

The International Environment continued

Self-reference criterion

Unconscious reference to your own cultural values when judging behaviors of others in a new and different environment.

Adds complexity to doing business in foreign environments.

What Is International Business and What Is Different about It? 11

The International Environment continued

International managers have three choices in deciding what to do with a concept or a technique employed in domestic operations: transfer it intact, adapt it to local conditions, or not use it oversees.

International managers who discover there are differences in the environmental forces are better prepared to decide which option to follow.

Figure 1.1 International Business Environments

International environment

Domestic environment

(includes socioeconomic, sociocultural, political, legal, distributive, competitive, physical, labor, financial, technological, and economic environments)

Foreign environment

(includes socioeconomic, sociocultural, political, legal, distributive, competitive, physical, labor, financial, technological, and economic environments)

Access the text alternative for slide images.

Is Internationalization of Business a New Trend, and Will It Continue? 1

The History of International Business

Phoenician and Greek merchants traded abroad well before the time of Christ.

Expansion of agricultural and industrial production in China stimulated the emergence of an internationally integrated trading system.

The trading system profoundly impacted politics, the arts, agriculture, industry, and public health.

Is Internationalization of Business a New Trend, and Will It Continue? 2

The History of International Business continued

The Ottoman Empire’s emergence before 1300, ultimately spanning Europe, North Africa, and the Middle East, profoundly influenced emerging trade routes for people, goods, money, animals, and microorganisms.

The 17th and 18th centuries have frequently been termed the “age of mercantilism” because the power of nations depended directly on the sponsorship and control of merchant capital operating internationally.

Is Internationalization of Business a New Trend, and Will It Continue? 3

The History of International Business continued

A number of multinational companies existed in the late 1800s, such as Singer Sewing Machine, J&P Coats, Ford Motor Company, and Bayer.

Is Internationalization of Business a New Trend, and Will It Continue? 4

Recent Trends in International Business

While most multinationals are based in developed nations, there has been a recent surge in the number arising in emerging economies.

The rapid urbanization of populations combined with industrialization in the emerging markets is quickly shifting the world’s economic center of gravity from Europe and the Americas and back to Asia.

Figure 1.2 Evolution of the World’s Economic Center of Gravity from AD 1 to 2025

Access the text alternative for slide images.

Source: “Urban World: Cities and the Rise of the Consuming Class,” McKinsey Global Institute, June 2012.

The Growth of International Firms and International Business 1

Expanding Numbers of International Companies

Transnational corporation

An enterprise made up of entities in more than one nation, operating under a decision-making system that allows a common strategy and coherent policies.

It is estimated there are more than 103,000 transnationals with nearly 900,000 foreign affiliates.

Transnationals collectively account for more than half of world trade and 10 percent of world gross domestic product.

The subsidiaries of foreign companies have become increasingly important in the industrial and economic life of many nations.

The Growth of International Firms and International Business 2

Foreign Direct Investment and Exporting Are Growing Rapidly

Foreign direct investment (FDI)

Direct investments in equipment, structures, and organizations in a foreign country at a level sufficient to obtain significant management control.

Does not include mere foreign investment in stock markets.

The Growth of International Firms and International Business 3

Foreign Direct Investment and Exporting are Growing Rapidly continued

Exporting

The transportation of any domestic good or service to a destination outside a company or region.

Importing

The transportation of any good or service into a country or region, from a foreign origination point.

What Is Driving the Internationalization of Business? 1

Five major kinds of drivers, all based on change, are leading international firms to internationalize their operations:

Political

Technological

Market

Cost

Competitive

What Is Driving the Internationalization of Business? 2

Political Drivers

Trend toward the unification and socialization of the global economy.

Progressive reduction of barriers to trade and foreign investment by most governments.

Privatization of much of the industry in formerly communist nations and the opening of their economies globally.

Concerns about protectionism by host country markets still exist.

What Is Driving the Internationalization of Business? 3

Technological Drivers

Advances in computers and communications technology permit an increased flow of ideas and information across borders.

Allows smaller companies to communicate with customers aborad and compete globally.

Computer-based communication may enhance virtual integration.

What Is Driving the Internationalization of Business? 4

Market Drivers

As firms internationalize, they also become global customers.

Firms go abroad to prevent foreign suppliers from gaining access to their customers.

Mature home country markets may encourage companies to consider nations with rising GDP/capita, population growth, and higher rates of GDP growth.

Globalization of Business

Citgo Petroleum Corporation, although based in the United States, is majority owned by Venezuela’s state-owned PDVSA.

Library of Congress [LC-DIG-mrg-05333]

What Is Driving the Internationalization of Business? 5

Cost Drivers

Going abroad can frequently lower the cost of goods sold.

Globalization of product lines reduce development, production, and inventory costs.

Some governments offer investment incentives to foreign business.

What Is Driving the Internationalization of Business? 6

Competitive Drivers

Businesses may choose to go national for many reasons:

Defend home markets by distracting competitors.

Guarantee the supply of key raw materials.

Entry into downstream markets to protect existing business.

What Are the Arguments for and against the Globalization of Business? 1

Economic Globalization

The tendency toward an international integration and interdependency of goods, technology, information, labor and capital, or the process of making this integration happen.

The merits of globalization are hotly debated.

What Are the Arguments for and against the Globalization of Business? 2

Concerns with Globalization

Has produced uneven results across nations and people.

Has had deleterious effects on labor and labor standards.

Has contributed to decline in environmental and health conditions.

Demonstrators at a World Trade Organization meeting.

What Are the Arguments for and against the Globalization of Business? 3

Arguments Supporting Globalization

Free trade enhances socioeconomic development.

Free trade promotes more and better jobs.

Get That Job! From Backpack to Briefcase

Ryan Hultzman

Ryan Holtzman describes his experience working in China for 5 months, the challenges he faced, and how he overcame them.

If you were to immerse into a culture that was quite different from your own and which had a language very different from your own, as Holtzman did, how effective do you think his recommendations would be for enabling you to adjust effectively? How would you assess the value of his recommendations, and what other approaches might you use to enhance the pace and effectiveness of your acculturation?

Courtesy of Ryan Hultzman

Students will have various answers to this question, depending on their experience with other cultures as well as their own self-awareness and self-confidence. Holtzman emphasizes the value of finding good friends whom he can trust, including those from the local culture. He emphasizes the benefit of finding tutors or culture guides, as well as being proactive in learning about the country and its practices. He emphasizes the value of preparing prior to arriving in the country, as well as the value of continued competence building efforts while in-country.

MiniCase

The minicase “Are You Really Buying American?” explores the issue of the origin of products and brands, and the companies that own them.

Should it matter to consumers whether the companies that make their products are based in the consumers’ home country or not? Explain your rationale.

Why has there been almost no negative backlash among Americans to the flood of foreign investment into their country?

1. Answers are likely to vary quite a bit on this question. Many students will exhibit patriotism and nationalistic zeal, emphasizing the importance of having a strong domestic economy in order to create the jobs, developmental opportunities, and other elements that they perceive to be critical to national prosperity and identify. Other students may argue that all countries and their workers should have an opportunity to achieve success and that those who are most efficient or effective at designing, building, distributing, and selling should be the ones to benefit. Some students may argue that efficient utilization of resources within a market-based system will require that certain jobs or tasks be located in other countries, and indeed that win-win outcomes are likely if barriers to international efficiency can be reduced or eliminated. The variety of positions that are likely to be presented can provide the basis for a lively discussion or even debate within the classroom and provide a strong link to the concepts of internationalization of businesses, economic globalization, and the need for IB skills among all students and managers.

2. This question can prove to be difficult for some students to answer. On one hand, students may note that the U.S. is a major investor in foreign nations and therefore cannot be overly protectionist when investments also go the other direction. Other students may argue that people have increasingly come to terms with the notion that it is a global marketplace and that foreign investment and ownership of domestic companies and brands by foreign-based firms is the new normal. Yet other students may question the assumption, arguing that there is a strong level of discomfort or even opposition to the level of foreign investment in the U.S., and perhaps even expand on the risks that such investment creates to the sovereignty of the country and its potential for economic prosperity.

End of Main Content

No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Because learning changes everything.®

www.mheducation.com

Accessibility Content: Text Alternatives for Images

Figure 1.1 International Business Environments – Text Alternative

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The diagram depicts a sample domestic environment surrounded by five foreign affiliates which all make up the international environment.

The domestic environment and each of the foreign affiliates have their own controllable forces: marketing, personnel, finance, and production.

These controllable forces operate within each environment’s unique set of external, uncontrollable forces: socioeconomic, sociocultural, political, legal, distributive, competitive, physical, labor, financial, technological, and economic.

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Figure 1.2 Evolution of the World’s Economic Center of Gravity from AD 1 to 2025 – Text Alternative

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Points are plotted in various countries on the map to depict the world’s economic center of gravity during various years.

In general, the center of gravity began in the Middle East in the year 1,000 (or A D 1), moved west through Europe and toward the Americas for most of the century before reaching Iceland in 1950, then began to shift back toward the east during the following decades. It is projected that in 2025 the center of gravity will be near Mongolia.

Specific points on the map are as follows: 1,000 (or AD 1) Afghanistan, 1500 Tajikistan, 1820 Kazakhstan, 1913 Sweden, 1940 Norway, 1950 Iceland, from 1960 to 2000 the center of gravity moved back east toward Russia, 2010 Russia, and 2025 Mongolia.

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