INTERNATIONAL BUSINESS AND GLOBALIZATION
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
WEEK 1
Learning Outcomes.
After studying this chapter, you should be able to:
1. Explain the meaning of business and international business.
2. Explain the factors that drive international business.
3. Explain the benefits of international business.
4. Explain the scope of international business.
5. Explain the difference between domestic business and international business.
6. Explain the meaning of globalization.
7. Explain the benefits of globalization.
8. Explain criticisms of globalization.
9. Describe methods of entering international markets.
10. Describe a multinational company.
A.
Introduction:
Globalization is dominating almost all sectors of international business as most
countries remove trade barriers and pave the way for international business growth and
expansion (Wardhana, et al, 2023; Bailey, 2023; Hill, 2022; Daniels, Radebaugh, et al, 2017).
Over the past 15 years, world exports of goods grew by an average of 6% per year.
International business has become the backbone of every economy and country. For any that
want to grow economically It is very important for them to encourage international business.
The benefits of international business are immense. International business, when run with
specific goals by companies and supported by governments from different countries can bring
overall economic growth. Every company and government has many concrete reasons to
conduct their business internationally, however, it is necessary to consider the various
limitations of globalization (Wardhana, et al, 2023; Suprapto, Jhohari., Deni, 2023; Hill,
2022; Verbeke, and Le, 2022; Czinkota, Ronkainen, et al, 2021; Wild, and Wild, 2021;
Geringer, and Mcnett, 2019; Daniels, Radebaugh, et al, 2017).
B.
Definition of Business and International Business:
Business is an economic activity associated with the continuous buying and selling of
goods and services to fulfill human wants. A business is an organization involved in trading
goods and services or both to consumers. Business today covers a complex area of trade and
industry including production and distribution activities of goods and services. For
companies, business is related to various decisions i.e. what to produce? When is it
produced? For whom is it produced? Where is it produced? How much is produced? In
simple terms, it can be said that modern-day business is very complex. The dynamic and
changing environment makes business enterprises always consider their business strategies
(Wardhana, et al, 2023; Verbeke, and Le, 2022). Stephenson defines business as the
production or regular purchase and sale of goods carried out with the aim of making a profit
and accumulating wealth through the fulfillment of human desires (Wardhana, et al, 2023;
Hill, 2022; Geringer, and Mcnett, 2019).
International business is the buying and selling of goods and services across national
borders. This business activity can be conducted by both governments and private companies.
In international business, companies cross national borders to expand their business activities,
such as manufacturing, mining, construction, agriculture, banking, insurance, health,
education, transportation, communication, and so on (Wardhana, et al, 2023; Anderson, 2023;
Czinkota, Ronkainen, et al, 2021; Geringer, and Mcnett, 2019). Before making a decision,
companies involved in international business must take a very broad and long view and
consider the social, political, historical, cultural, geographical, physical, ecological, and
economic aspects of the other countries in which they do business. Naturally, international
business is a major determinant of international trade where one of the successful outcomes
of international business ventures is globalization. International Business is a process that
focuses on global resources, organizational goals, opportunities, and threats of global
business. International business is defined as the global trade of goods or services or
investments (Bailey, 2023; Wardhana, et al, 2023; Dunung, and Carpenter, 2023; Czinkota,
Ronkainen, et al, 2021; Cavusgil, Knight, et al, 2019; Geringer, and Mcnett, 2019).
C.
Drivers of International Business:
The various drivers of international business can be described as follows (Anderson,
2023; Wardhana, et al, 2023; Dunung, and Carpenter, 2023; Hill, 2022; Czinkota, Ronkainen,
et al, 2021; Cavusgil, Knight, et al, 2019):
1. Business Objective for Higher Rate of Profits. The basic goal of business is to achieve
profits. When the domestic market does not promise high profits, the company looks for
foreign markets where there are opportunities to achieve higher profits higher profits.
Therefore, profit objectives influence and encourage businesses to expand their operations to
foreign countries. For example, Hewlett Packard in the United States gets more than half of
its profits from foreign markets compared to the domestic market. Apple's international sales
account for about 60% which is a big part of Apple's success.
2. Expanding the Production Capacities beyond the Demand of the Domestic Country. Some
domestic firms expand their production capacity beyond the demand for products in the home
country. In such cases, companies are forced to sell their excess production to developed
countries in the international market. For example, Toyota, a Japanese automotive company,
has adopted the strategy of local production for local consumption in expanding its
production capacity beyond the demand in its home country. Toyota engaged in global
expansion by setting up production facilities in various countries especially in North
America. It aims to increase production capacity and meet global demand itself including in
the American market. Toyota has implemented strategies to cope with the growing demand.
In November 2023, Toyota's global production jumped 11%, reaching a record high in
response to rising global demand (Reuteurs, 2023). By setting up production facilities in
various countries, Toyota can keep pace with the significant growth in demand.
3. Limited Home Market. When the size of the domestic market is limited, either due to small
population size or low purchasing power, companies begin to internationalize their business
operations. For example, most automotive and electronics companies (Simanjorang, &
Aslami, 2022). Japan is entering the markets of the United States, Europe, and even Africa
due to the smaller size of the domestic market. In addition, PT Indofood Sukses Makmur Tbk
views Nigeria as the largest economic investment opportunity in the Central and Western
Regions of Africa with internationalization efforts to explore markets outside of Indonesia.
4. Political Stability vs. Political Instability. Political stability means not only the continuity of
the ruling party, but also the continuity of government policies for a considerable period of
time. The United States, United Kingdom, France, Germany, Italy and Japan are examples of
countries that have political stability. Most African countries and some Asian countries tend
to be politically unstable. Companies prefer to enter countries that have political stability and
avoid locating their business operations in politically unstable countries. In fact, companies
tend to move their operations from politically unstable countries to politically stable
countries. For example, Shell as a global energy and petrochemical company operating in
more than 70 countries tends to operate in countries with high political stability indicating a
preference for a reliable business environment. Shell tends to avoid foreign direct investment
(FDI) in countries with high political instability in favor of countries with lower risk.
5. Availability of Technology and Competent Human Resources. The availability of advanced
technology and competent human resources in some countries is an attractive factor for
companies from home countries. Developed countries for this reason attract companies from
developing countries. In fact, companies The US and Europe, in recent years have been
relying on Indian companies for software products and services through business process
outsourcing as professional fees in India are 10 to 15 times lower compared to the US and
European labor markets.
6. High Cost of Transportation. Initially, companies enter a foreign country for marketing
operations. But firms in the home country usually enjoy higher profit margins compared to
firms in the destination country due to product transportation costs. Under such conditions,
foreign companies tend to increase their profit margins by locating their manufacturing
facilities in the destination country through the foreign direct investment (FDI) route to meet
the demand of one country or a group of neighboring countries. For example, Mobil Oil
Company formerly known as Socony-Vacuum Oil Company is one of the major oil
companies in the United States that supplies petroleum products to Ethiopia, Kenya, Eritrea,
Sudan, etc. from its refinery in Saudi Arabia and established its refinery facility in Eritrea to
reduce transportation costs.
7. Nearness to Raw Materials. High-quality raw material resources available in large quantities
are the main factors that attract companies from various foreign countries. For example,
Vedanta Resources, the world's largest UK-based mining and non-ferrous metals company
listed on the London Stock Exchange (LSE), operates primarily in India due to the
availability of raw materials such as iron ore, copper, zinc and lead. The company also has
substantial operations in Zambia and Australia where copper is abundant.
8. Liberalization and Globalization. Most countries in the world are shedding their economic
limitations and opening up their countries to the international community. This policy change
attracts multinational companies to expand their operations to countries with economic
limitations. For example, China has implemented policies that support the expansion of
multinational companies' operations in the country by encouraging foreign investment in the
form of providing incentives for foreign companies to operate in China, improving foreign
investment regulations, facilitating the business processes of foreign companies in the
country, and providing support to multinational companies that invest in the country. In
addition, Indonesia is also known as a country that is open for global business by providing
great opportunities for multinational companies to expand their operations in Indonesia
through regulations on Foreign Direct Investment (PMA).
9. To Increase Market Share. Some large international companies want to increase their market
share globally by expanding and intensifying their business operations in foreign countries.
Small companies expand internationally to survive, while large companies expand to increase
their market share. For example, Ball Corporation, the third largest beverage can
manufacturer in the United States, bought the European packaging operations of Continental
Can Company. It then expanded its operations to Europe and met European demand that was
200 percent higher than in the United States. Thus, the company increased its global market
share of soft drink cans.
D.
Benefits of International Business:
The various benefits that can be obtained from international business can be described
as follows (Dunung, and Carpenter, 2023; Wardhana, et al, 2023; Hill, 2022; Czinkota,
Ronkainen, et al, 2021; Cavusgil, Knight, et al, 2019) namely:
1. High Living Standards. Comparative cost theory suggests that countries that have
advantages in raw materials, human resources, natural resources, and climatic conditions in
producing certain goods, can produce low-cost as well as high-quality products. Customers in
different countries can buy more products with the same amount of money. This can improve
people's standard of living through increased purchasing power and increased consumption of
high quality products. For example, PT Freeport Indonesia, a copper and gold mining
company owned by the United States, benefits from the natural resources of copper and gold
mines in Indonesia by utilizing the expertise of human resources in the mining sector and the
climatic conditions that allow mining operations in Indonesia.
2. Increased Socio-Economic Welfare. International business increases the level of
consumption and economic welfare of the people of countries that conduct international
trade. For example, Chinese people now enjoy products from various countries such as Coca-
Cola products, McDonald's products, Japanese electronic products (Simanjorang, & Aslami,
2022), and coffee from Brazil. Therefore, China's consumption level and socio-economic
welfare have increased.
3. Wider Market. International business expands the market and increases the size of the
market. Therefore, companies do not need to depend on product demand, tastes and
preferences of customers in one country alone. For example, due to a wider market, Air
France now relies more on air travel demand from customers in countries other than France.
This is also true for most multinational companies such as Toyota, Honda, Xerox, and Coca-
Cola.
4. Reduced Effects of Business Cycles. The stages of the business cycle vary from country to
country. Hence, multinational companies shift from countries experiencing recession to
countries experiencing boom conditions. This allows the company to international to avoid
recessionary conditions. For example, Unilever, a multinational company that focuses on
consumer goods such as various products in nutrition, hygiene, and personal care, is a Dutch
and British-owned company based in London that strategically expands its presence in
countries with resilient economies during global economic uncertainty. The company is
investing in markets such as Indonesia and Vietnam which are showing economic resilience
and growth despite recessionary environments in other parts of the world.
5. Reduced Risks. Companies that engage in international business can reduce commercial and
political risks because their investments and business operations are spread across different
countries. Multinational company Starbucks engages in international business with global
expansion to reduce dependence on a single market. This strategy helps Starbucks overcome
commercial and political risks with diverse locations that provide economic stability.
6. Large-scale Economies. Multinational corporations benefit from large-scale economies due
to the wider and larger scope of their business markets, resulting in larger product quantities,
lower production costs, availability of expertise, quality, and so on. Apple, for example, is a
global technology company that manufactures its electronic devices in various locations
including the United States and China. With a large scale of production, Apple can control
production costs and maintain quality standards (Simanjorang, & Aslami, 2022).
7. Potential Untapped Markets. International business provides an opportunity to explore and
exploit potential untapped international markets. These foreign markets provide opportunities
to sell products at higher prices than in the domestic market. For example, Bata sells shoes in
the UK for £100 (about Rp. 1,500,000), while the price in Indonesia is about Rp. 120,000.
8. Provides the Opportunity to Domestic Business. International business companies provide
opportunities to domestic companies. These opportunities include technology, management
expertise, market intelligence, product development, and so on. For example, Japanese
companies such as Honda, Yamaha, Suzuki, and Kawasaki joined forces to form joint
ventures with Indian companies such as Hero Honda, Birla Yamaha, Maruti Suzuki, and
Kawasaki Bajaj to share technology and product development expertise. In addition, Astra
International (ASII) and Toyota conducted a joint venture in Indonesia by establishing a joint
venture company in the fourth quarter of 2022 under the name PT Mobilitas Digital Indonesia
(MDI) which focuses on the commercial vehicle rental and logistics business in the
Indonesian market. This joint venture involves Astra International through its subsidiary, PT
Arya Kharisma (AKH), and Toyota Motor Corporation through Toyota Motor Asia Pacific
Engineering and Manufacturing Ltd.
9. Division of Labour and Specialization. International business leads to division of labour and
specialization. For example, Brazil specializes in coffee, Kenya in tea, Japan in automotive
and electronics (Simanjorang, & Aslami, 2022), India in textile apparel, Indonesia in palm
oil, and so on.
10. Economic Growth of the World at Large. Specialization, division of labor, productivity
improvement, development to overcome challenges, innovation, and creativity to overcome
international competition lead to overall economic growth in countries around the world.
International business in particular helps Asian countries such as Japan, Taiwan, Korea, the
Philippines, Singapore, Malaysia, and the United Arab Emirates to increase their economic
growth.
11. Optimum and Proper Utilization of World Resources. International business provides for the
flow of raw materials, natural resources, and human capital from countries where they are
over-resourced to countries where they are under-resourced or where products are most
needed. For example, the flow of human capital from India, consumer goods from the UK,
France, Italy, and Germany to developing countries. This, in turn, helps in the optimal and
proper use of the world's resources.
12. Cultural Transformation. The benefits of international business are not only economic or
commercial but also social and cultural. Today, the countries of the Western world are slowly
moving towards the countries of the Eastern world and vice versa which means that the
cultural factors and good values of the Eastern countries are adopted by the Western countries
and vice versa. Thus, there is cultural transformation and close integration. For example,
McDonald's as one of the world's largest fast-food restaurants originating from the United
States has adopted the values of Eastern countries in their business strategy in the Asian
market. They serve menus tailored to local tastes and preferences in various Asian countries,
such as McSpicy Chicken in India or rice-based menus in Southeast Asia including
Indonesia.
E.
Scope of International Business:
The scope of international business is very broad, including international trade,
international economic integration, international investment, international organizations,
international monetary systems, foreign exchange, international business strategy,
international regulation, international strategic management, international human resource
management, international production and logistics management, international marketing
management, international financial management, and similar matters (Wardhana, et al, 2023;
Hill, 2022; Verbeke, and Le, 2022; Czinkota, Ronkainen, et al, 2021; Geringer, and Mcnett,
2019).
F.
Difference Between Domestic Business and International Business:
Trade means the exchange of goods and services to fulfill human wants. The process of
exchange involves buying and selling goods and services. Trade can take place within the
geographical boundaries of a country or it can extend across national borders. When trade is
confined to the geographical boundaries of a country it is referred to as domestic or national
trade. In national trade, both buyers and sellers are from the same country and they enter into
trade agreements that are subject to national trade laws, practices, and customs (Wardhana, et
al, 2023; Pertiwi, and Priyono, Joko, 2018; Schaffer, Agusti, et al, 2017). However,
international or foreign trade refers to trade between two countries. Buyers and sellers are
citizens of two different countries and are subject to international or bilateral trade laws and
tariffs (Wardhana, et al, 2023; Pertiwi, and Priyono, Joko, 2018; Schaffer, Agusti, et al,
2017). Technically, domestic trade and international trade are more or less identical and are
based on the same basic principles of trade (Hill, 2022; Cavusgil, Knight, et al, 2019;
Geringer, and Mcnett, 2019). There are certain similarities between domestic and
international businesses in terms of general corporate goals and objectives (Wardhana, et al,
2023; Czinkota, Ronkainen, et al, 2021; Geringer, and Mcnett, 2019), namely:
1. Generate income.
2. Build the company's image and brand.
3. Satisfy customers and build loyalty as loyal buyers.
4. Conduct their operations with respect and compliance with local regulations.
5. Creating employment opportunities.
6. Both are subject to a set of codes of conduct and ethics that include corporate
governance.
However, in practice, there are certain differences between domestic business and
international business. Based on these differences, classical economists developed a separate
theory for international trade. Some of the key differences are as follows (Wardhana, et al,
2023; Hill, 2022; Czinkota, Ronkainen, et al, 2021; Geringer, and Mcnett, 2019):
1. Environment. Economic, political, legal (Pertiwi, and Priyono, Joko, 2018; Schaffer, Agusti,
et al, 2017), socio-cultural, competitive, and technological environments are well known in
domestic businesses due to geographical similarities and places of operation. Therefore,
organizations can take necessary precautions to assess their impact and adjust quickly to
changes in the same. In international business operations, various aspects of the macro
external environment are not fully known and create their place in the international market. A
countless number of hidden environmental factors can emerge during the period of operation
and can pose problems. For example, an Indian company looking to enter and establish its
business operations in the European market will face many political, legal, socio-cultural and
other issues that arise in the external macro environment during the initial stages of its
business operations. When fast food company McDonald's entered India in 1996, it had to
ensure that it did not offer pork or beef products to be accepted locally. McDonald's also had
to redesign their business operations to address the special needs of vegetarians in India and
introduce variations in dishes that were not available in McDonald's outlets anywhere in the
world. McDonald's first entered Indonesia in 1991 by not offering pork products in order to
be locally accepted by the majority of Muslims in Indonesia.
2. Plans and Strategies. Plans and strategies are generally designed for the short term. Short-
term plans are linked and passed on to the long term. The reverse is also possible as domestic
business offers flexibility to the organization. In international business, only long-term
planning and strategy must be well thought out, proven, practical, and time-bound to be able
to succeed (Verbeke, and Le, 2022). For example, PT Indofood CBP Sukses Makmur Tbk
(ICBP), which exports instant noodle products, especially Indomie, to 50 countries, is one of
the multinational companies from Indonesia that has successfully implemented a strategy of
investment and expansion into international markets by understanding local markets and
adapting its products according to consumer preferences in various countries and conducting
strategic partnerships with local and global parties to expand business reach and strengthen
its position in the international market.
3. Competition. Competitive forces operating within the domestic business environment are
limited to the local market. Competitive forces can be analyzed and understood more clearly
in the local market. In international business, competitive forces are not limited to local
boundaries. They extend to several countries, making it difficult to analyze their motivations
and movements. For example, Nestle strategically expanded its business operations in
emerging markets such as Indonesia, China and India, where economic conditions are more
favorable for growth and consumption. The company's move aims to capitalize on the rapidly
growing middle-class market in these three countries.
4. Currency Differences. There is only one currency that is accepted in all countries so there is
no difficulty in making payment transactions in international trade. However, each country
has its own its own monetary system that is different from others. The exchange rate between
two currencies is set by the monetary authority based on rules created by the International
Monetary Fund (IMF). All import payment transactions must be made in the currency of the
exporting country which is not freely available in the importing country (Silaban, & Rejeki,
2020; Ismanto, Kristiani, & Rina, 2019). Foreign currency scarcity can sometimes limit the
size of imports from other countries (Bailey, 2023). For example, foreign currency scarcity in
Indonesia can limit the amount of imports from other countries. This can happen when the
exchange rate of the Rupiah against the US Dollar is under pressure, which results in a
decline in the Rupiah's exchange rate against the US Dollar, making import costs increase
because they must be paid in US Dollars.
5. Tariffs and Quotas. Tariffs and quotas imposed by various countries on their exports and
imports do not directly and significantly affect domestic business operations. International
businesses are directly and significantly affected by tariffs imposed by different countries.
They also have to operate within export and import quotas imposed by different countries
(Safitri, & Aslami, 2022; Hodijah, & Angelina, 2021; Silaban, & Rejeki, 2020; Siregar,
Pratiwi, Nurhasanah, & Sinaga, 2019). For example, Indonesia's rice import tariff and quota
protection policy in 2024 of 1 million tons of rice from India and 2 million tons of rice from
Thailand has a significant impact on the availability of imported rice in Indonesia and the
export performance of Indian and Thai rice.
6. Research and Development. It is very natural and relatively easier to conduct business
product research, innovation, demand analysis, and customer surveys in domestic businesses.
Similarly, the reliability and success rate of results are much higher in the domestic market.
For example, Nestle Maggi has developed and introduced vegetable Atta noodles, a variety of
noodles available mostly only in India and not in other countries based on market research.
Research and development in international business operations is expensive and difficult to
conduct. Their reliability criteria depend on individual countries and there is no uniformity in
their application results. Nestle Maggi has developed noodle variations like Curry Letup and
Pizza which are exclusively sold in Malaysia and Saudi Arabia and may not be suitable for
the Indian market.
7. Human Resources. Thanks to a proven track record of past success and established systems,
a business can thrive if its human resources have the minimum skills and knowledge. The
task of human resource management becomes much simpler in businesses in the domestic
market. International business requires multilingual, multistrategy (Verbeke, and Le, 2022),
and multicultural human resources to cope with risks spread across different countries.
Therefore, the task of human resource management becomes much more complex. For
example, an airline company such as LIFT as a regional airline based in Johannesburg, South
Africa operates in a global environment with multiple markets and customers from different
countries. Therefore, having an HR team that is able to communicate in multiple languages is
important to efficiently handle customer needs. LIFT's people need to have a deep
understanding of these diverse business strategies to effectively manage the portfolio. LIFT's
human resources need to have multicultural sensitivity to establish good relationships with
business partners, customers and related parties around the world.
8. Vision and Goals of the Organization. The vision and objectives of the organization in the
domestic business are focused on working in one country with the aim of steady growth. For
example, Garuda Indonesia has a vision to be the preferred airline company in Indonesia and
competitive internationally with a mission to carry out air transportation and related services
with high safety standards to meet the needs of domestic and international customers. Garuda
Indonesia's goals are to become a sustainable airline company that connects Indonesia to the
world, provides services that reflect Indonesian hospitality, and promotes and supports
Indonesian tourism through reliable flight services.
9. Investment. Depending on the size of business operations in the domestic market, companies
can start with minimum investment. The involvement of regulatory agencies in the case of
local small businesses is limited. On the other hand, all overseas operations except exports,
require huge investments to set up and expand business in many countries (Bailey, 2023).
Specific regulatory agencies are involved in the process due to foreign currency transactions
(Chow, and Schoenbaum, 2022). For example, Bank Indonesia issued regulations, such as
Bank Indonesia Regulation No. 24/7/PBI/2022 that regulates the reporting of foreign
exchange transaction data and information by banks. The regulation authorizes Bank
Indonesia to supervise and regulate foreign currency transactions in the foreign exchange
market. In addition, the Law of the Republic of Indonesia Number 7 of 2011 concerning
Currency provides a legal basis that regulates the use of Rupiah in every transaction related to
Indonesia with the aim of maintaining economic stability and the Rupiah exchange rate
(Pertiwi, and Priyono, Joko, 2018).
10. Distribution. Business enterprises in the domestic market may at their discretion choose any
distribution channel to reach customers. For example, in the Regulation of the Minister of
Trade of the Republic of Indonesia, there are provisions regarding the appointment of local
agents or distributors for foreign companies. This regulation requires foreign companies to
appoint local agents or distributors, have Exclusive Distribution Rights to the goods to be
sold, and are prohibited from selling products directly to end-users in accordance with
existing regulations. For example, Caterpillar is a heavy equipment company headquartered
in Irving, Texas, United States, which has been known to be very strict in regulating the sale
of heavy equipment in Indonesia through its sole agent, PT Trakindo Utama. Sales of heavy
equipment units and spare parts from Caterpillar in Indonesia are only carried out by PT
Trakindo Utama and its branch offices in various regions. There is no gap for traders other
than PT Trakindo to sell heavy equipment units and spare parts from Caterpillar in
Indonesia.
11. Logistics. Business in the domestic market may involve the use of conventional logistics
methods involving domestic players for procurement of raw materials and delivery of end
products to consumers. International business involves international players involving
advanced technology and systems to operate in an effective international market. For
example container transportation is the standard form of delivering goods to destinations in
most developed countries. For example, PT Terminal Petikemas Indonesia is a state-owned
enterprise that focuses on managing the largest container terminal in Indonesia by providing
services in the logistics chain, especially export/import containers in Indonesia.
12. Advertising and Promotion. Advertising, personal selling and other promotional methods
are subject to regulations applicable to business operations in the domestic market. For
example, advertising and promotion of pharmaceutical drugs, cigarettes and alcohol are
restricted in Indonesia. In international business, each country has different regulations
related to advertising and promotion. For example, cigarette and alcohol advertising is only
allowed in some developed countries, but in Indonesia, class A alcoholic beverages
containing ethyl alcohol or ethanol with a level of up to 5%, have special provisions
regarding advertising and liquor, while class C with an alcohol content of 20% to 55%, is
prohibited to be advertised. Google Ads prohibits advertising online sales of alcoholic
beverages in Indonesia.
13. Approach. The approach to business in the domestic market is ethnocentric, meaning that
domestic companies formulate strategies (Verbeke, and Le, 2022), product designs, etc. for
national markets, customers, and competitors. International business approaches can be
polycentric, regiocentric, or geocentric. In the polycentric approach, international businesses
enter foreign markets by establishing foreign subsidiaries. In the regiocentric approach, they
export products to neighboring countries of the host country. In the geocentric approach, they
treat the whole world as a single market for production, marketing, investment, and obtaining
various inputs. For example, Sony Corporation has ethnocentric tendencies with a policy of
centralizing decisions at its headquarters in Japan, Nestlé is a polycentric example as it lets
subsidiaries in different countries manage their business autonomously by following local
conditions. General Motors (GM) is known as a company that applies a regiocentric approach
by giving authority to the region or region to make appropriate decisions with local market
conditions. IBM is a company that implements a geocentric strategy by making decisions
based on global and local interests and integrating global and local elements in its operations.
14. Differences in Natural and Geographical Conditions. Natural resources such as
availability of raw materials, soil composition, soil fertility, rainfall, temperature, etc. differ
greatly from country to country. Based on such specialization, countries will specialize in the
production of certain selected commodities and therefore they produce better quality goods at
lower prices and sell them in the international market leading to differences in domestic trade
and international trade. For example PT Perusahaan Perdagangan Indonesia (PPI) is a state-
owned enterprise engaged in domestic and international trade. PPI produces high-quality
products at lower production costs domestically such as staples, cooking oil, rice, dish soap,
fertilizers, and pesticides, and then successfully sells them in the international market at
higher prices by leveraging the reputation of Indonesian products.
15. Different Legal Systems. Different legal systems are operated by different countries and
they are all very different from each other. The main difference with the laws of other
countries lies in the regulations, duty rates, and other provisions applicable in each country.
The existence of different legal systems makes the task of entrepreneurs more difficult as
they have to follow the legal provisions of two countries with respect to a particular trade
(Pertiwi, and Priyono, Joko, 2018; Schaffer, Agusti, et al, 2017). For example, the European
Union has sued Indonesia at the WTO regarding the nickel ore export ban that came into
effect in 2020.
16. Mobility of Factors of Production. The mobility of various factors of production is less
between countries than within the country itself. However, with the advent of air transport,
the mobility of labor has increased manifold. Similarly, capital mobility has increased with
the development of international banking. Despite these developments, the mobility of labor
and capital is not as much as that found within the country itself. For example, Apple has
major production facilities in several countries, but the mobility of its key production factors
such as design, research, and marketing, tend to be centered in the United States.
17. Sovereign Political Entity. Each country is an independent sovereign political entity.
Countries impose various types of restrictions on imports and exports in the national interest.
Importers and exporters must abide by these restrictions when making deals. These
restrictions may include imposing tariffs and customs duties on imports and exports,
quantitative restrictions such as quotas, exchange controls, imposing additional local taxes,
and so on. No such restrictions are imposed on domestic trade or the restrictions imposed on
internal trade are very different. For example, Boeing, as the world's largest aircraft
manufacturer is affected by different tariff and customs policies in different supplier countries
especially in the global supply chain. Policies affecting the import of raw materials or aircraft
components may affect Boeing's production costs and competitiveness in the international
market.
G.
Meaning of Globalization:
Globalization is a further form of internationalization of business that implies a degree
of functional integration between internationally dispersed economic activities that reflects
the increased freedom and The capacity of individuals and companies to conduct economic
transactions with residents of other countries (Wardhana, et al, 2023; Chow, and
Schoenbaum, 2022). Globalization is a process of international integration arising from the
exchange of worldviews, products, ideas, and other cultural aspects. Globalization refers to
the processes that drive the global exchange of national and cultural resources. Advances in
transportation and telecommunications infrastructure including the development of the
internet have accelerated the globalization of economic activities (Wardhana, et al, 2023;
Hill, 2022).
Some basic activities such as investment especially foreign direct investment (Bailey,
2023; Wardhana, et al, 2023), the spread of technology, strong institutions, good
macroeconomic policies, an educated workforce, and the existence of a market economy lead
to greater prosperity. There is substantial evidence from countries undergoing globalization
that their citizens benefit in the form of access to goods and services, lower prices, more and
better paid jobs, better health, and higher living standards. Over the past 20 years, as more
countries have become more open to global economic forces, the percentage of developing
countries living in extreme poverty on less than $1 a day has been reduced by 50%.
Economic globalization is a historical process, the result of innovation and technological
advancement that refers to the increasing integration of economies around the world
primarily through the movement of goods, services, and capital across national borders.
Sometimes the term also refers to the movement of labor and technology across international
borders. There are also broader cultural, political and environmental dimensions of
globalization (Wardhana, et al, 2023; Czinkota, Ronkainen, et al, 2021; Geringer, and
Mcnett, 2019).
The term globalization began to be used more commonly in the 1980s reflecting
technological advances that made international transactions both trade and financial flows
easier and faster (Wardhana, et al, 2023; Chow, and Schoenbaum, 2022; Hill, 2022).
According to the International Monetary Fund (IMF), globalization means the growth
of economic interdependence among countries around the world through an increase in the
volume and diversity of cross-border transactions in goods and services, international capital
flows, and also through faster and wider spread of technology (Wardhana, et al, 2023; Chow,
and Schoenbaum, 2022). Globalization refers to the process of increasing economic
integration and increasing economic interdependence between countries which means the
integration of various world economies into one global economy thereby reducing economic
disparities between countries. This is achieved by removing all restrictions on the movement
of goods, services, capital, labor, and technology between countries. Globalization leads to
increased levels of interaction and interdependence between countries. There is a free flow of
goods, services, technology, management practices, and culture across national borders. From
a country's perspective, globalization means the integration of a country's domestic economy
with the world economy (Wardhana, et al, 2023; Hill, 2022; Geringer, and Mcnett, 2019).
In short, globalization implies the ability to produce in the most efficient way anywhere
in the world, the ability to access raw materials and management resources from the cheapest
sources anywhere in the world, and making the world one market. Global companies conduct
their business operations around the world as if the whole world were one entity.
Globalization also implies the emergence of a world where innovation can occur anywhere in
the world (Wardhana, et al, 2023; Daniels, Radebaugh, et al, 2017).
More importantly, globalization implies that information and knowledge are spread and
shared around the world. Innovators in business or government can take ideas that have been
successfully implemented in a jurisdiction and adapt them to their own jurisdiction. Joseph
Stiglitz, Nobel laureate and critic of globalization has observed that globalization has reduced
the isolation felt in much of the developing world and given many in the developing world
access to knowledge further afield.
According to Kumari, and Goel (2020), globalization can be divided into the following
four stages:
1. Globalization 1.0 (1492 to 1800) was a period when companies did business by globally
expanding into different countries to acquire resources, spread religious missions, and
conduct imperialistic colonization to control resources from other countries.
2. Globalization 2.0 (1800 to 2000) was a period when companies did business by globally
consolidating themselves into different countries to expand the global market and find
cheap labour in different countries. This is in line with the industrial revolution that
succeeded in lowering transportation costs through the invention of the steam engine,
railways, and also lowering telecommunication costs through the invention of the
telegraph, telephone, personal computers, fiber optics, satellites, and websites.
3. Globalization 3.0 (started in 2000) is a period when individuals and small groups do
business to develop their international markets. This period is characterized by the use of
various electronic media such as digital content, software, fiber optics, and so on.
4. Globalization 4.0 (started in 2019) is a period when business is conducted in
anticipation of rapid technological developments. This period is characterized by
international financial and monetary systems, network security, corporate and industrial
governance, new social agreements, and the use of technologies such as Artificial
Intelligence (AI), Robotics, Internet of Things (IoT), 3D printing, genetic engineering,
Cloud Computing, and so on (Williams, James, Milner, 2018; Sung, et al., 2016).
H.
Benefits of Globalization:
The benefits of globalization are described below (Wardhana, et al, 2023; Czinkota,
Ronkainen, et al, 2021; Geringer, and Mcnett, 2019; Daniels, Radebaugh, et al, 2017):
1. Increased Competitiveness of Domestic Industries. Globalization opens domestic
industries in developing countries to foreign competition which puts domestic firms under
pressure to improve efficiency, quality, and reduce costs. Under state protection regimes,
domestic industries lose the impetus to improve efficiency and quality. Globalization helps
improve the competitiveness and economic growth of developing countries. For example,
Indonesia, with its abundant natural resources, took advantage of globalization to increase the
competitiveness of commodity exports such as coffee (Ginting, & Kartiasih, 2019). Starbucks
has a main supplier of coffee from Humbang Hasundutan Regency in North Sumatra
Province. PT Sari Coffee Indonesia is part of the Starbucks network and acts as the
Indonesian entity involved in supplying coffee to Starbucks.
2. Access to High Technology. For developing countries like Indonesia, globalization provides
access to new technologies where Indonesian companies can acquire advanced technologies
through direct purchase or through partnerships and other agreements. For example, Shopee,
which is part of the SEA Group operating in Indonesia, brings advanced technology in its e-
commerce platform and delivery services (Said, & Aslami, 2022). In addition, Garuda
Indonesia, the national airline, has codeshare agreements with SkyTeam Airline Alliance
members that bring the latest aviation technology and practices to the aviation industry in
Indonesia.
3. Access to Foreign Investment. Globalization has attracted much-needed foreign capital to
developing countries (Bailey, 2023) such as Indonesia. Foreign multinational companies have
invested billions of dollars in Indonesia. In addition, foreign institutional investors have
brought large funds to the stock market in Indonesia. For example, US technology companies
Google and Microsoft have branches in Indonesia, demonstrating long-term investment and
commitment to the Indonesian market. In addition, ExxonMobil, an American multinational
energy company has signed agreements for major investments in several locations around the
world including Indonesia.
4. Production Cost Reduction. In a globalized environment, companies can obtain raw
material and labor resources at lower costs. For example, some foreign companies have
established Business Process Outsourcing (BPO), a practice where an organization contracts
an external service provider to carry out one or more critical business processes in Indonesia
due to lower labor costs. Sometimes, a company may conduct its entire production in a
foreign country to minimize production costs. For example, PT Unilever Indonesia Tbk is a
company that conducts most of its production stages in Indonesia. Unilever has factories in
various cities in Indonesia including Cikarang and Surabaya. By producing locally in
Indonesia, Unilever can reduce production costs to a lower level given the more affordable
labor costs in Indonesia and more efficient supply chain management.
5. Growth and Expansion. When the domestic market is not large enough to absorb all
production, domestic companies can expand and grow by entering foreign markets. Japanese
companies flooded the US market with cars and electronics (Simanjorang, & Aslami, 2022)
for this reason. Companies from the US, Europe and other developed regions are increasing
their presence in Asia due to population growth (Yunianto, 2021) and rising income levels in
Asian countries.
6. Higher Trade Volume. Thanks to globalization, each country can specialize in the
production of goods and services in which it has a comparative advantage. Countries can
export their surplus production and import their goods freely from other countries. This will
not only lead to a phenomenal increase in world trade but also better allocation and utilization
of resources in each country. For example, Indonesia, which has superior commodities,
namely palm oil and coffee heads (Patone, Kumaat, & Mandeij, 2020; Maulana, &
Nubatonis, 2020); Ginting, & Kartiasih, 2019) exports to various countries in the world.
7. Consumer Welfare. Goods and services that have good quality and low prices will become
more accessible to consumers around the world. As consumption choices become wider, it
will help improve the standard of living of people in developing countries (Yunianto, 2021).
Over time, the proportion of the population below the poverty line will decrease. Consumers
also gain access to products produced in different parts of the world. For example, good-
quality and low-priced goods and services from China are becoming more accessible to
Indonesian consumers such as smartphones, electronic devices (Simanjorang, & Aslami,
2022), accessories, clothing, shoes, fashion accessories, household goods, furniture,
decorations, beauty and skincare products, kitchenware, cleaning tools, and so on.
8. Cooperation and World Peace. Globalization also offers several benefits that help in the
professionalization of management. Globalization brings people of different races and
backgrounds around the world closer together which helps promote cooperation and world
peace. For example, the national company Coca Cola hires employees from different races
and backgrounds around the world.
I. Critique of Globalization:
Various criticisms of globalization as outlined below (Dunung, and Carpenter, 2023;
Wardhana, et al, 2023; Czinkota, Ronkainen, et al, 2021; Daniels, Radebaugh, et al, 2017):
1. Threats to Domestic Industry. Globalization has resulted in the increasing role of foreign
companies in a country's domestic economy. This can hinder the growth of domestic
companies. Small and medium-sized companies in developing countries like Indonesia are
unable to compete with giant companies from developed countries. For example, Batik
MSME companies are unable to compete with large batik companies from China that offer
much cheaper prices. In addition, Cibaduyut shoe MSMEs are also unable to compete with
shoes from large Chinese companies due to limited capital, small markets, and less
competitive prices.
2. Unemployment. Globalization brings rapid technological change. Advanced technology can
create unemployment problems, especially in developing countries (Indayani, & Hartono,
2020). For example, the use of e-Toll technology has resulted in a reduction in human
resources for toll payment services. The use of e-commerce technology such as online shop
marketplaces makes outlets in malls become quiet and there is a reduction in employees. The
use of e-book technology has caused sales of printed books in various bookstores to decline
dramatically, resulting in a reduction in employees. The use of banking technology such as e-
banking, i-banking, mobile-banking, phone-banking services, and ATMs, resulted in a
significant reduction in bank employees, and so on.
3. Threats to Democracy. Globalization entails the rapid movement of capital and labour
across national borders. Globalization can reinforce social inequality by focusing economic
benefits on certain groups and increasing economic and social disparities within society. For
example, the entry of foreign modern markets or foreign retailers such as Lotte Mart,
Carrefour, UniqLo into Indonesia has an impact on traditional markets in Indonesia.
Traditional markets face difficulties competing with foreign modern markets that usually
have much larger investment capital, much more modern technology, more efficient
management, higher quality and more varied products, more competitive prices, and much
larger promotional funds and product promotion through various print and electronic media,
and so on.
4. Economic Instability. Globalization has resulted in a tremendous redistribution of economic
power. Such redistribution will result in a redistribution of political power. These changes are
likely to have destabilizing effects. For example, the economic openness brought about by
globalization can make countries vulnerable to external interference. The influence of foreign
actors in political and economic policies can destabilize governments. For example, US
interference in the security of their investment assets in the mining company PT Freeport
Indonesia operating in Papua will affect the Indonesian government's policies.
5. Disregard for National Interests. Emerging economies become overly dependent on global
corporations. This becomes incompatible with the national interest. For example, the removal
of business protection against global companies entering Indonesia such as the opening of
foreign gas stations in Indonesia such as Shell gas stations (Netherlands), Vivo gas stations
(China), Petronas gas stations (Malaysia), Exxon Mobil gas stations (USA), British
Petroleum gas stations (UK) will have an impact on Indonesia's Pertamina gas station
business.
6. Poses Various Risks. Some of these risks are:
a.
Political and Regulatory Risks. Many countries in the world are politically unstable
and the transfer of political power does not always go smoothly in these countries.
Therefore, companies doing business in these countries may face risks related to new
political regimes. Similarly, many countries have different types of regulations for doing
business that differ significantly from those in the home country. Therefore, the
regulations of the host country must be taken into account. For example, in India there
are 280 products protected by anti-dumping instruments, the Philippines also applies
protection to 250 products, Meanwhile, Indonesia has a policy to protect local products
and consumers from the invasion of foreign products with Government Regulation No.
80/2019 on Trade.
b.
Cultural and Managerial Risks. Countries differ significantly in terms of cultural
characteristics such as customer preferences and tastes, attitudes towards certain types of
products or services, traditions, values, and beliefs, and other cultural factors. Therefore,
products or services must be tailored to the needs of these consumers. In addition, since
management practices are cultural in nature, the type of management practices that are
effective in the home country may not be suitable in a foreign country. Therefore,
appropriate changes in management practices are required, especially in relation to
human resource aspects. For example, Law No. 13 Year 2003 on Manpower in Indonesia
regulates working hours and rest hours including protection in performing Friday prayers
for the majority of Muslim employees working in foreign companies in Indonesia.
c.
Foreign Exchange Risk. Every country has its own currency system where one
country's currency does not circulate in another country. Therefore, one currency is
exchanged for another at a certain rate. Exchange rates continue to fluctuate which
causes the risk of loss for international business people (Bailey, 2023; Ismanto, Kristiani,
& Rina, 2019). For example, if the US Dollar (USD) exchange rate strengthens against
the Rupiah or the Rupiah weakens against the USD, then Indonesian exporters will
benefit because they receive payment for exported goods in USD which when converted
into Rupiah becomes larger (1 USD = Rp 15,000 to 1 USD = Rp 17,000) while importers
will be disadvantaged because they have to pay for imports in USD by spending more
Rupiah to convert to USD (1 USD = Rp 15,000 to 1 USD = Rp 17,000). And vice versa.
d.
Credit Risk is the risk of loss due to the inability of a debtor to repay a loan or other
credit both principal and interest. It is difficult to assess the creditworthiness of foreign
buyers and when a foreign buyer purchases on credit and the foreign buyer goes
bankrupt, the domestic exporter faces huge losses due to the risk of losing the unpaid
debt of the foreign buyer.
e.
Transportation Risks. Due to the long distances between countries, goods are shipped
via sea or air freight. Sea and air transportation are much more prone to various risks
compared to land shipping. For example, the sinking of the container ship MV X-Press
Pearl in the sea off Colombo, Sri Lanka, which caught fire and sank resulted in losses for
both exporters and importers.
f.
Market Risk. Competition in international business is intense and market conditions
change frequently resulting in risks for companies to compete in international markets.
For example, Cipaganti Karya Guna Persada experienced significant financial difficulties
in its investment in the coal sector due to the impact of losses from fluctuations in coal
commodity prices which experienced a significant decline in the international market.
J.
Stages of Developing a Company into a Global Enterprise
In general, a company goes through various stages of development before becoming a
global company. Generally, domestic companies start their international business with
exports. Then, the company may form partnerships or subsidiaries abroad. From international
companies, companies can develop into multinational companies and finally become global
companies (Wardhana, et al, 2023; Hodijah, & Angelina, 2021; Wild, and Wild, 2021;
Czinkota, Ronkainen, et al, 2021; Daniels, Radebaugh, et al, 2017).
Ohmae (2005) from McKinsey Japan identifies five stages in the development of a
company into a global company, namely:
1. First Stage. Exporting is the first stage and is also the least restrictive mode of entry into
foreign markets used by companies using an International or Global strategy where local
response is low. Domestic companies enter new markets abroad by cooperating with
local dealers and distributors (Verbeke, and Le, 2022).
2. Second Stage. As the company's involvement with the market increases, it will move
into the second stage by introducing some marketing functions into the country such as
setting up a trade representative office which could be linked to any of the other four
modes depending on the level of involvement which could indicate that the company is
moving towards a multidomestic strategy.
3. Third Stage. In the next stage, domestically-based companies begin to conduct their
own production in foreign markets using the methods of licensing, joint venture
partnerships, or establishing subsidiaries in foreign markets, indicating a shift to a
multidomestic or global strategy.
4. Fourth Stage. The fourth stage of globalization is the transfer of headquarters functions
to a subsidiary in the destination country. In the fourth stage, the company moves to a
full insider position in that market supported by complete business systems including
R&D. This stage forces managers to replicate in the new environment through setting up
hardware, systems, and operational approaches that have been successful at the
headquarters in the home country which forces them to extend the reach of setting up
overseas subsidiaries by providing support functions such as personnel and finance for
all overseas activities.
5. Fifth Stage. In the fifth stage, the company switches to a truly global mode of operation.
The fifth stage is to transfer the functions of the headquarters in the home country to the
headquarters in the destination country. The subsidiary in the destination country
develops into the headquarters in the destination country that has demonstrated expertise
similar to the transnational strategy (Ghoshal and Bartlett, 1989). The functions that are
moved back can be human resources, financial functions from shared service operations,
R&D back to a number of locations to better optimize synergies, and so forth. There is
some evidence that this is starting to happen, especially in competitive industries such as
automotive and micro-electronics. There is some evidence that this is happening in the
pharmaceutical industry. Recent large mergers are symptomatic of this.
In this context, Ohmae (2005) points out that a firm's ability to serve local customers in
markets around the world in a way that is truly responsive to their needs as well as the global
character of the industry depends on its ability to create a new organizational equilibrium that
Sony's Akio Morita calls the global local (glocal), a new orientation that simultaneously
looks in both directions. Ohmae (2005) argues that to make this organizational transition, a
company must denationalize its operations and create a value system that is shared by
corporate managers around the world.
Ohmae (2005) further observes that today's global companies have no nationality as
consumers have become less nationalistic. Global companies serve the interests of customers
and not governments. They do not exploit the local situation and then repatriate all profits
back to the country of origin, thus leaving the local government to take advantage of the local
situation every local area is poorer because of them. They invest, provide training, pay taxes,
build infrastructure and deliver good value to customers in all the countries where they do
business. For example, IBM Japan has provided jobs to around 20,000 Japanese people and
over the past decade provided three times more tax revenue to the Japanese Government than
Japanese companies such as Fujitsu. Today, many companies around the world have
ambitious plans to become global companies.
K.
Methods of Entering International Markets
The various methods used to enter the international market are (Wardhana, et al, 2023;
Daniels, Radebaugh, et al, 2017):
1. Exporting is the easiest and most widely used way to enter the international market.
Exporters can be classified in various ways as follows:
a.
Small or Large Exporters. Depending on the size of the business, exporters are classified
as either small or large exporters. The current foreign trade policy in Indonesia provides
incentives and facilities to promote both small and large exporters that have foreign
exchange earning performance status.
b.
Single Product or Multiproduct Exporters. Exporters depending on the product line
being exported can be classified as single product or multi-product exporters.
c.
Depending on Legal Status. Exporters are classified as joint venture companies, partner
companies, private limited liability companies (PT), and public limited liability companies
(PT Tbk) (Pertiwi, and Priyono, Joko, 2018; Schaffer, Agusti, et al, 2017).
d.
Depending on Export Destination. Exporters are classified as single-destination
exporters or dual-destination exporters. Today, most companies adopt a multiproduct,
multilocation, multistrategy (Verbeke, and Le, 2022), and multidimensional operating
philosophy.
e.
Depending on the Frequency of Exports, Exporters are classified as occasional
exporters and dynamic exporters. Exports involve indirect exports, direct exports, and
intra-corporate transfers.
Exporting can be classified into three groups namely:
a.
Indirect Exporting is the process of exporting products in their original or modified form
to a foreign country through another domestic company, which is a way of market entry
that offers the lowest risk and minimal market control. The company is not involved in
international marketing and no special activities are carried out within the company.
Sales are handled like domestic sales. Several publishers in India, including Himalaya
Publishing House sell their products such as books to UBS publishers of India who then
export the books to various foreign countries.
b.
Direct Exporting is the direct sale of products to a country through a distribution
agreement or through a host company (another country). Baskin Robins initially exported
its ice cream to Russia in 1990 and subsequently opened 74 outlets with Russian
partners. Finally, in 1995, the company established an ice cream factory in Moscow.
c.
Intracorporate Transfers means the sale of products by a company to its affiliated
companies in the host country (another country). For example, sale of products by
Hindustan Lever in India to Unilever in the United States. This transaction is considered
an export in India and an import in the United States. Some factors that a company
should consider when exporting include: (1) government policies such as export policy,
import policy, export financing, and foreign exchange (2) marketing factors such as
image, distribution network, responsiveness to customers, customer awareness, and
customer preferences and (3) location considerations involving physical distribution
costs, warehouse costs, transportation costs, inventory storage costs, and so on.
2. Licensing is a method of foreign operations where a company in one country agrees to grant
permission to a company in another country to use the manufacturing, processing,
trademarks, specialized knowledge, or other expertise provided by the licensor. Coca Cola is
an excellent example of licensing. In Zimbabwe, United Bottlers has a license to make Coca
Cola. In return, the licensee manufactures the licensor's products, markets these products in a
defined territory, and pays royalties to the licensor that are tied to the volume of product
sales. An international license is an agreement between a licensor and a licensee for a
specified period of time to use trademarks, marketing know-how, copyrights, work methods,
and trade marks by paying a license fee. For example, British American Tobacco Company
(BATS) licenses in many countries to manufacture their cigarette brand 555. In India, ITC is
a licensed manufacturer
555. Pepsi Cola licenses Heineken from the Netherlands giving them the exclusive right to
produce and sell Pepsi Cola in the Netherlands. The licensor has minimum involvement in
the day-to-day functioning of the company days. Therefore, returns are also relatively low.
Domestic companies can choose any international location and enjoy the benefits without
bearing the obligations and responsibilities of ownership, managerial, investment and so on.
License advantages include:
a.
A good way to start foreign operations and open the door to low-risk manufacturing
relationships.
b.
Bringing new technology and know-how in the licensee's country.
c.
The interconnectedness of the interests of the parent and the receiving partner means that
both get the best results from the marketing efforts.
d.
Unrestricted capital in foreign operations and options to invest in partners or provisions to
receive royalties in the form of shares.
Some disadvantages of licenses are as follows:
a.
The form of participation is limited to the duration of the agreement, a specific product,
process or trademark.
b.
Potential returns from marketing and manufacturing may be lost.
c.
Partners develop specialized knowledge, so licenses are short.
d.
Licensees become competitors because once knowledge is transferred, there is a risk that
foreign companies may act on their own.
e.
Requires considerable research, planning, investigation and interpretation.
3. Franchising refers to the method of practice and use of someone else's business philosophy.
The franchisor grants the franchisee the right to distribute products, techniques, and brands
franchisor for a percentage of monthly gross sales and a royalty fee. Various tangible and
intangible items such as national or international advertising, training, and other support
services are generally provided by the franchisor. Agreements generally last between 5 to 30
years. Businesses that are said to be most suitable for franchising have the following
characteristics:
a.
A business with a good profit record.
b.
A business built around a unique or unusual concept.
c.
Businesses with broad geographic appeal.
d.
A business that is relatively easy to operate.
e.
A relatively cheap business to operate.
f.
A business that is easy to duplicate.
Franchisor. Selects franchises and provides operational system services, receives a fixed
amount of trademark, product reputation, and royalties from support systems such as
employee training, expertise, and brand quality assurance programs for franchises, and so on.
Franchisee. Franchisees who agree to follow the franchisor's requirements sign a franchise
agreement such as appearance, operational procedures, financial reporting, customer service.
Some franchisees pay a fixed amount and receive flexibility allowed by the franchisor with
regard to royalties based on sales.
The benefits to the Franchisor are:
a.
Expansion. Franchising is one of the available ways to access venture capital without the
need to give up control over the operations of the business chain in the process. Once the
brand and formula have been carefully designed and well executed, the franchisor will be
able to A franchisor can sell its fast-growing franchises across countries in the world
through the use of the capital and resources of its franchisees, and can earn profits
proportionate to their contribution to those communities by reducing the risks and costs
associated with its conventional chain operations.
b.
Legal Considerations. Franchisors are relieved of many of the daily tasks required to
open new outlets such as obtaining the necessary licenses and permits (Pertiwi, and
Priyono, Joko, 2018; Schaffer, Agusti, et al, 2017). In some jurisdictions, some permits
especially alcohol licenses are easier to obtain by locally based establishments, while
establishments based outside the jurisdiction especially if they are from other countries
have difficulty or impossible to obtain such permits. Therefore, hotel and restaurant
chains that sell alcohol often have no choice but to franchise if they want to expand into
other states or provinces.
c.
Operational Considerations. Franchisees have greater incentives than employees to
operate their franchised business. The franchisor's obligation to closely inspect the day-
to-day operations of its franchisees' outlets is greatly reduced compared to outlets owned
directly by the franchisor.
The benefits for Franchisees are:
a.
Employment. As in the retail business, franchising gives franchisees the advantage of
starting a new business quickly using the franchisor's trademarks and business formulas
that are already proven to be profitable as opposed to having to build a new business and
brand from scratch start-ups that are often faced with aggressive competition from other
franchises.
b.
Expansion. With the help of the expertise provided by the franchisor, the franchisee can
expand its franchised business to higher levels of success that would not have been
possible without the expert guidance of the franchisor.
c.
Training. Franchisors often offer significant training to franchisees that is available free
of charge to franchisees compared to individuals starting their own business from scratch.
While training is not provided free of charge to franchisees, it is sometimes supported
from franchise fees collected by the franchisor and tailored to the business being started.
The disadvantages for the franchisor are:
a.
Control. Franchising success requires a more careful selection process when evaluating
the number of potential franchisees compared to hiring direct employees who may have
experience. Incompetent managers of a franchisee outlet can be easily replaced.
Incompetent franchisees can easily damage the good image of the franchisor's brand with
the public by providing inferior goods and services. If a franchisee violates the law, the
franchisee will face legal consequences themselves, but the franchisor's reputation may
also be adversely affected (Pertiwi, and Priyono, Joko, 2018; Schaffer, Agusti, et al,
2017).
b.
Limited number of viable franchisees. In any city or region, there may only be a limited
number of candidates who have the financial resources and desire to purchase and start a
franchise business, compared to individuals who can be hired and trained to manage a
franchise business as paid employees. However, in a period of recession where good jobs
are hard to come by, then they are willing to invest money in a franchise independently.
The disadvantages for franchisees are:
a.
No guarantees. There are generally guarantees of financial success for franchisees made
by the franchisor in writing in the franchise agreement. Franchise outlets sometimes fail.
Unfortunately, the financial performance data of both successful and failed franchise
outlets is not required to be disclosed by franchisors to new franchise buyers, so new
franchise buyers must assess the chances of success and failure of their own investment of
the franchise business.
b.
Control. For franchisees, the main disadvantage in franchising is loss of control. Although
the franchisee gains the use of systems, trademarks, assistance, training, marketing, the
franchisee is required to follow the franchise system and obtain approval for changes from
the franchisor.
c.
Price. To start and operate a franchise business costs money. In choosing to adopt the
standards set by the franchisor, the franchisee often has no further choice regarding
signage, store styling, uniforms, and so on. Franchisees may not be allowed to seek
alternatives that are more cost-effective cheap. In addition, there are franchise fees and
royalty fees as well as advertising costs. The contractual agreement may also bind the
franchisee to changes requested by the franchisor from time to time.
d.
Conflict. The franchisor-franchisee relationship can easily lead to conflict if either party is
incompetent or acts dishonestly. An incompetent franchisor can damage its franchisees by
not promoting the brand properly or they are too aggressive in pursuing profits. Franchise
agreements are unilateral contracts or contracts of adhesion where the terms of the contract
generally favor the franchisor over the franchisee when conflicts arise in the franchise
business relationship.
4. Contract manufacturing is a process that establishes a working agreement between two
companies. As part of the agreement, one company will manufacture the work or product
according to the client's request. In most cases, the manufacturer will also handle the ordering
and shipping process for the client. As a result, the client does not need to maintain a
manufacturing facility, purchase raw materials, or hire labor to produce the finished goods.
The working model used in contract manufacturing can be applied in various industries. The
process is essentially outsourcing production to a partner who will private-brand the final
product. There are many types of businesses that can utilize contract manufacturing
agreements. Currently, there are several examples in contract manufacturing that serve as
agreements in food production, computer component manufacturing, and other electronic
contract manufacturing (Simanjorang, & Aslami, 2022). In fact, industries such as personal
care and hygiene products, electronic components, automotive parts, and tools are also being
utilized healthcare is often made within the framework of a contract manufacturing
agreement. There are several advantages to contract manufacturing agreements. For the
manufacturer, there is a guarantee of stable employment. The fact that contract
manufacturing sets production levels for a period of 1, 2, or even 5 years makes it easier to
predict the financial stability of the company in the future. As for the client, there is no need
to buy or rent production facilities, purchase equipment, buy raw materials, or recruit and
train employees to produce goods. There are also no problems with employees not working,
equipment breakdowns, or other small details that manufacturing companies have to deal
with every day. All the client needs to do is generate sales, forward orders to manufacturers,
and maintain accurate records of all income and costs associated with the business venture.
5. Management Contracts are agreements where operational control of a company is handed
over by contract to a separate company that performs the necessary managerial functions in
return for a fee. Management Contracts do not simply involve the sale of a method of doing
something as opposed to franchising or licensing, but involve the performance of those tasks.
Management Contracts can involve various functions such as operations, production facility
engineering, personnel management, accounting, marketing services, and training.
Management Contracts have been used extensively in the aviation industry especially when
foreign government actions restrict entry methods other than management contracts.
Management Contracts are often formed when there is a lack of local skills to run a project
which is an alternative to foreign direct investment as it does not involve the risks involved
high and can provide higher results for the company.
6. Turnkey Projects refer to something that is ready for immediate use, commonly used in the
sale or provision of goods or services. The term is common in the construction industry,
where it refers to the grouping of materials and labor by subcontractors. A turnkey job by a
plumber would include parts such as toilets, bathtubs, faucets, pipes, and plumber labor. The
term turnkey job is commonly used in motorsports to describe cars that are sold with
drivetrains such as engines, transmissions, and so forth because drivers may choose to keep
these parts for use in other vehicles to maintain combinations. Similarly, the term turnkey job
may be used to advertise the sale of an established business including all the equipment
needed to run it or by a business-to-business supplier that provides a complete package for
starting a business. In a turnkey business transaction, various entities are responsible for
building plant or equipment for example, railroad infrastructure and operating it which
includes contractual actions, at least through the installation phase of systems, subsystems, or
equipment which can also include follow-on contractual actions, such as testing, training,
logistical, and operational support which are often awarded to the best bidder in the
procurement process. Turnkey projects can also be expanded, known as turnkey plus, where
there is a small equity interest by the supplier and will continue to operate through
management contracts or licenses. The term turnkey is also often used to describe a house
that is built and ready for the customer to move into. If a contractor builds a turnkey house
occupancy, they installed the structure and finished the interior. Everything was finalized
down to the cabinets and carpets.
7. Foreign Direct Investment Without Alliances. Some companies enter foreign markets
through exports, licenses, franchises, and so on to gain knowledge and understanding of
foreign markets, foreign country cultures, foreign customer preferences, foreign country
political situations, and so on. Then set up manufacturing facilities with ownership in the
foreign country. Baskin Robbins in Russia follows this strategy. In this arrangement, the
international company makes a direct investment in a production unit in the foreign market
which requires the largest commitment as it has 100% ownership which is also called
Greenfield investment. The parent company starts a new venture in a foreign country by
building a new operational facility from scratch. In addition to building new facilities, most
parent companies also create long-term jobs in the foreign country by hiring new employees.
Greenfield investment occurs when a multinational company enters a developing country to
build new factories and/or stores. Developing countries often offer tax cuts, subsidies and
other types of incentives to prospective companies to set up Greenfield investments.
Governments often see that the loss of corporate tax revenue is a small price to pay if jobs are
created and knowledge and technology are gained to improve the country's human capital.
8. Foreign Direct Investment with Strategic Alliances. Innovation, creation, productivity,
growth, expansion and diversification in recent years have largely been achieved through
strategic alliances adopted by various companies. A strategic alliance is a cooperative
approach to achieve a larger goal. Alliances Strategic alliances can take various forms such as
licenses, franchises, manufacturing contracts, joint ventures, and so on. Alliances are a
strategy to explore new markets that cannot be accessed by individual companies (Verbeke,
and Le, 2022; Wild, and Wild, 2021). For example, Xerox of the United States and Fuji of
Japan teamed up to explore new markets in Europe and the Pacific. This collaboration aims to
expand the geographical reach of both companies into the Europe and Pacific region,
leverage each other's expertise and technologies to create superior products and services,
diversify product and service portfolios, and bring joint innovations in technology and
business solutions to strengthen competitive positions in the Europe and Pacific markets.
9. Mergers and Acquisitions. International mergers and acquisitions are evolving every day.
They refer to the process of mergers and acquisitions that take place outside the boundaries of
a particular country. International mergers and acquisitions are also referred to as global
mergers and acquisitions or cross-border mergers and acquisitions. Globalization and global
financial reform together contribute to the significant development of international mergers
and acquisitions. International mergers and acquisitions occur in various forms, such as
horizontal mergers, vertical mergers, conglomerate mergers, congeneric mergers, reverse
mergers, dilutive mergers, accretive mergers, and others. International mergers and
acquisitions are done to gain a number of strategic benefits in the market of a particular
country. With the help of international mergers and acquisitions, multinational companies can
enjoy a number of advantages, including economies of scale and market dominance.
International mergers and acquisitions play an important role in the growth of a company.
These deals or transactions help many firms enter new markets quickly and achieve
economies of scale (Chow, and Schoenbaum, 2022). They also stimulate foreign direct
investment (FDI). Leading international mergers and acquisitions bodies also provide
education and training programs to enhance the skills of mergers and acquisitions
professionals working in the global mergers and acquisitions sector. The rules and regulations
surrounding international mergers and acquisitions are constantly changing and it is
imperative for the parties involved to keep themselves updated with the various amendments.
Many professionals in investment banks, consultants, and lawyers are ready to provide
valuable and knowledgeable recommendations to merger and acquisition clients. An example
of a merger is Heinz, an American food manufacturer, merged with Kraft Foods Group, a
multinational food and beverage company, to become The Kraft Heinz Company. The
purpose of forming The Kraft Heinz Company is to create a food and beverage corporate
entity that is one of the largest in the world, achieve operational synergies, improve
efficiency, strengthen market position, and deliver high-quality products, delicious flavors,
and nutrition that meet consumer needs in a variety of eating occasions. An example of an
acquisition is Toyota's full acquisition of Daihatsu in 2016 which aims to strengthen Toyota's
position in the global market, expand and diversify its product portfolio, and develop small
cars.
10. A Joint Venture is an entity formed between two or more parties to undertake joint economic
activities. The parties agree to create a new entity to share revenues, costs, and control over
the company. A joint venture can be defined as a company in which two or more investors
share ownership and control of the rights to the company. property and operations. These
ventures can be for one specific project only or an ongoing business relationship. Entering a
joint venture is a big decision. Businesses of any size can use joint ventures to strengthen
long-term relationships or to collaborate on short-term projects. For example, the joint
venture between Nestle and Indofood formed a company called PT Nestle Indofood Citarasa
Indonesia (NICI) which aims to combine the expertise and resources of both companies in
producing food and beverage products to achieve better synergies, improve product
competitiveness, and expand market reach.
L.
Multinational Corporation (MNC)
Multinational companies are companies that operate in several countries and have
operations or subsidiaries abroad (Gupta & Govindarajan, 1994). Multinational companies
are often major players in the global economy, with significant influence and impact on the
countries in which they operate. Typically, they have substantial resources and the ability to
utilize economies of scale and scope to compete effectively in various markets around the
world. One of the key advantages of multinational corporations is their ability to access
diverse talent and take advantage of various regulatory environments. This allows them to
adapt to changing market conditions and capitalize on opportunities in different regions.
However, multinationals also face challenges such as managing cultural differences,
navigating complex legal and political landscapes, and addressing ethical considerations in
their global operations. Overall, multinational corporations play an important role in shaping
the global business landscape and driving economic growth across borders. (Wang et al.,
2010; Aybar & Thirunavukkarasu, 2005; Kostova, 2003; Ensign, 1999; Herbert, 1984). An
example of a multinational company is Apple, which has expanded its operations to various
countries in the world by opening retail stores in more than 50 countries and has an online
store that can be accessed by consumers around the world. McDonald's, as one of the largest
fast food restaurant chains in the world, operates in more than 100 countries. With more than
38,000 locations worldwide, McDonald's has established its presence in various international
markets. Countries such as Australia, Canada, France, Germany, and the United Kingdom are
among the significant international markets for McDonald's that account for the majority of
its revenue.
M.
Summary:
Business as the production or regular purchase and sale of goods carried out with the
aim of making a profit and accumulating wealth through the fulfillment of human wants.
International business refers to the buying and selling of goods and services across national
borders.
The various factors driving international business are higher profits, expanding
production capacity, limited domestic market, political stability vs. political instability,
availability of technology and competent human resources, high transportation costs,
proximity to raw materials, liberalization and globalization, and increasing market share.
The various benefits that can be derived from international business are high living
standards, increased socio-economic welfare, broader markets, reduced impact of business
cycles, reduced risk, economies of scale, untapped market potential, providing opportunities
to domestic businesses, division of labor and specialization, growth of the world economy as
a whole, optimal and appropriate use of world resources, and cultural transformation. The
scope of international business is vast and includes international trade, international economic
integration, international investment, international organizations, international monetary
system, exchange exchange foreign exchange, strategy international business strategy,
international regulation, international strategic management, international human resource
management, international production and logistics management, international marketing
management, international financial management, and things like that.
Some of the key differences between domestic trade and international trade are the
operating environment, plans and strategies, competition, currency differences, tariffs and
quotas, research and development, human resources, organizational vision and goals,
investment, distribution, logistics, advertising and marketing promotion, approaches,
different natural and geographical conditions, different legal systems, mobility of factors of
production, and sovereign political entities.
Globalization means the growing economic interdependence of countries around the
world through the increasing volume and variety of cross-border transactions in goods and
services, international capital flows, and also through the more rapid and widespread spread
of technology.
The benefits of globalization include increased competitiveness of domestic industries,
access to high technology, access to foreign investment, reduced production costs, growth
and expansion, higher trade volumes, consumer welfare, and world cooperation and peace.
Various criticisms of globalization include threats to domestic industries,
unemployment, threats to democracy, economic instability, ignoring national interests, and
posing various risks,
The stages of developing a company into a global company are exporting, increasing
the marketing function to the country, starting to do their own production in the foreign
market, transferring the function of the head office to a subsidiary in the country, and
transferring the function of the head office in the home country to the head office in the
destination country.
The various methods used to enter the international market are exporting, licensing,
franchising, contract manufacturing, management contracts, turnkey projects, foreign direct
investment without alliances, foreign direct investment with strategic alliances, mergers and
acquisitions, and joint ventures.
Multinational companies are companies that operate in several countries and have
overseas operations or subsidiaries.
N.
Practice Questions
1. Explain the meaning of business and international business?
2. Explain the factors that drive international business?
3. Describe the various benefits of international business?
4. Describe the scope of international business?
5. Explain the difference between domestic business and international business?
6. Explain the meaning of globalization?
7. Explain the benefits of globalization?
8. Explain the various criticisms of globalization?
9. Describe the various methods of entering international markets?
10. Explain what is meant by a multinational company (MNC)?
O.
Group Discussion:
Indomie Product Recall in Taiwan
Two supermarket giants in Taiwan have stopped selling Indomie instant noodles after
the Taiwanese government found banned preservatives in the product. Taiwan's Food Safety
Center has tested the Indomie noodles and will seek clarification from importers and
distributors regarding this incident. Importers from Hong Kong suspect that the Indomie
noodles were illegally transported to Thailand. Although some Taiwanese plan to switch to
other brands, Indonesian workers in Taiwan remain loyal to Indomie for its good taste and
affordable price.
The Taiwanese government announced the recall of Indomie after finding two banned
preservatives, methyl p-hydroxybenzoate and benzoic acid. These preservatives can only be
used in cosmetics and are banned in food in Taiwan, Canada and Europe. Consumption of
these preservatives can cause vomiting and even metabolic acidosis if consumed in large
quantities or over a long period of time.
ParknShop and Wellcome stores have recalled all Indomie products, while importer
Fok Hing (HK) Trading stated that the noodles met Hong Kong and WHO food safety
standards. An Indonesian supermarket in Taiwan, East-Southern Cuisine Express, also
confirmed that the Indomie they sell is safe for consumption. However, Indomie's
manufacturer, PT Indofood CBP Sukses Makmur Tbk, is reviewing the situation and is
committed to protecting consumers in Taiwan and other countries according to international
standards.
Discussion Questions:
1. Explain what problems occur in the above case?
2. What activities should be carried out by PT Indofood CBP Sukses Makmur Tbk to
overcome the above problems?
