INTERNATIONAL BUSINESS DYNAMICS
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
WEEK 1
LEARNING OBJECTIVES.
1.
Understand definitions for companies operating in multiple countries
2.
Understand the drivers that lead companies to internationalize
3.
Appreciate the dramatic internationalization of the market
4.
Understand why international business is different from domestic business
5.
Describe the domestic, foreign and international environments in which the company
operates internationally
INTRODUCTION
DEFINITION OF INTERNATIONAL BUSINESS
International business is a business activity with activities across national borders. The
parties to the transaction can be individuals, companies, groups of companies, government
bodies. Examples of international business are buying raw materials from a country to be
processed in another country, or buying goods from a country to be sold to another country,
or building a factory in another country to produce goods to be sold to that country or to other
countries. Another example is producing or buying goods or raw materials from one's own
country to sell to another country, or borrowing funds from a bank in another country to
finance investments or operations in one's own country or in another country.
As a discipline, international business is a relatively new and dynamic discipline. As
such, terms in international business are often defined differently. In this book, the definitions
of various terms commonly used in international business discussions are based on
commonly used notions.
One definition of international business is as a business with activities across national
borders. It can be distinguished from overseas business, which is business activity by a
company within a country outside of its own country. An Indonesian citizen who has a
permanent residence visa abroad, for example in Australia, and makes a living by opening a
restaurant in Sydney is an example of an overseas business. Meanwhile, domestic business is
defined as business activities among business people within a country.
A company that conducts international business activities is known as an international
company. International companies can be divided into international companies that operate in
only a few countries, and multinational companies (MNC = multinational company, or MNE
= multinational enterprise), which are international companies that operate in many countries.
There is also the term transnational company, which is a company that conducts operations in
many countries in the world with its headquarters not in the company's home country, but in
any country that the company deems appropriate as the location of its headquarters.
International MNEs can be differentiated based on their business strategy as either
multidomestic companies or global companies. Multidomestic company is a company that
conducts international business activities with many affiliates in various countries, each
formulating its own business strategy based on the different business environments faced in
each country. While a global company is a company that conducts international business with
a strategy that seeks to standardize and integrate its operations in the world in all its business
functions.
THE IMPORTANCE OF STUDYING INTERNATIONAL BUSINESS:
Broadly speaking, the skills and knowledge required for conducting international
business are the same as for conducting domestic business. However, although the basic
concepts of international business management are the same as those of domestic business
management, there is no doubt that the complexity of skills and knowledge to ensure success
in international business is different from that for domestic business. This is because
international business is much more complex than domestic business.
There are many reasons why it is necessary to study international business, for students,
for business people both domestic business people, let alone international business people, as
well as for government officials. The first reason is that all businesses today, both domestic
and international, cannot be separated from the influence of various events in the world, as
well as the influence of international companies. In addition, there is also the fact that almost
all large companies have or will have international business activities, or will always be
affected by the state and development of the world economy. Company leaders need to
Students need to know the state of international business in order to be able to assess the
opportunities and threats posed by the international world. Knowledge of international
business is needed by students if they are going to work in a foreign company or partly
owned by a foreign company, or a company that does international business, even if only in a
domestic company. Government officials need to study international business to be able to
issue policies and regulations that can allow the country to take advantage of opportunities
and face threats posed by the international world. The second reason to study international
business for students is that mastery of this knowledge is needed in order to remain
competitive with competitors from other countries in obtaining employment. With the
implementation of the AEC (ASEAN Economic Community), more prospective employees
from ASEAN countries can work in Indonesia, as well as opportunities for Indonesian
graduates to work in other ASEAN countries. Graduates who have never studied or lack
skills and knowledge about international business will find it difficult to compete with those
who have studied, so they are likely to be left out of the competition for quality jobs.
Nowadays, practically all universities in the world teach international business courses in
their curriculum, so Indonesian graduates who do not master international business will be
less able to compete for good jobs, compared to their Indonesian and foreign counterparts.
a country that masters international business.
The third reason is the fact that international business is a rapidly evolving science.
Company leaders need to be able to stay abreast of International business knowledge and
techniques, as they are no longer the monopoly of any one country. For example, the
concepts of Total Quality Management and Just-In-Time systems developed and practiced in
Japan have become the property of the world. Company leaders who do not follow the
development of world management techniques will not be able to bring their companies to
compete internationally.
INTERNATIONAL BUSINESS ACTIVITIES:
Initially, international business activities were carried out in the form of exports and
imports. Today, various forms of international business activities are common, and it is
expected that many more will be developed. International business activities are now
commonly carried out in the form of international trade, international licensing, or
international investment.
International trade can be in the form of exports, which involves producing products in
one's own country and selling them to other countries, or imports, which involves bringing in
products from other countries and selling them in one's own domestic market. Exports and
imports of products are usually divided into two categories: goods and services. Exports and
imports of goods include clothing, footwear, palm oil, computers, cotton, cattle, sugar, and so
on. Export and import of services such as shipping services, aviation services, tourism
services, accounting services, and so on.
Another form of international business is international investment, which is capital
supplied by businesses in one country to businesses in another. International investment can
be divided into two categories, namely foreign direct investment and portfolio investment.
Direct investment is a way of doing business with the aim of actively managing and
controlling a property, asset or company located in another country. Direct investment can
also be done by establishing a new company abroad. Portfolio investment is the purchase of
foreign financial assets (stocks, bonds, certificates of deposit) not for the purpose of
controlling the management of these assets, but to profit from the sale and purchase of these
assets.
Other forms of international business are licensing, franchising, and management
contracts. An international license is a contractual agreement in which a company in one
country grants the right to use its intellectual property (patents, logos, brands, logos,
copyrights, or trade secrets) to a company in another country for a fee called a royalty.
Examples of licenses include PT GS Battery is a licensee of Yuasa battery products from GS
Yuasa Corporation, Japan.
Franchising is a special form of licensing, which occurs when a company grants
another company abroad the right to use the company's entire way of operating, including
brands, logos, for a fee. Examples of international franchises include PT Rekso National
Food is the franchisee of McDonald's in Indonesia, PT Fastfood Indo- nesia is the franchisee
of Pizza Hut and also KFC in Indonesia.
A management contract is an agreement whereby a company in one country agrees to
operate a facility or provide other management services to a company in another country,
often with the company's brand, logo, or logo for a mutually agreed fee. Examples of
management contracts include various property companies entering into management
contracts with Ritz-Carlton in the hotel business.
BENEFITS OF INTERNATIONAL BUSINESS:
Various studies have been conducted to further explain why companies are interested in
entering foreign markets. It is recognized that international business carries a large risk,
although the expected return is also large. The benefits that are the impetus for a company to
do international business can be described below.
1. Increase profits and sales:
Every company faces pressure to increase its sales and profits, and if the domestic
market is saturated, it is logical for the company to seek other markets abroad. Sales can be
increased by entering foreign markets, because many countries are experiencing high per
capita income and population growth, and many countries are also experiencing economic
growth that is much faster than the domestic economy.
Increased profits can be obtained by increasing sales or lowering production costs, or
both. Many markets do not have as many competitors as domestic markets, so companies can
often gain increased sales through higher prices high in foreign markets. Higher prices than
the domestic market can also be obtained in countries with higher per capita income and
living standards than one's own country. An increase in sales is also automatically obtained
from the sum of the domestic and foreign markets.
Lower production costs can be achieved through economies of scale as sales increase,
which automatically lowers production costs. Foreign direct investment can also lower the
cost of production, either through the comparative advantages of the country where the
investment is made, or by the incentives often provided by the government of the country
seeking to attract direct investment to their country.
2. Protect markets, profits and sales.
Often companies have to do international business to protect their home market. This
is done in various ways and for various reasons, including:
a.
The need to follow key customers. A service company will set up business abroad
following its primary customer to prevent competitors from gaining access to the primary
customer through the foreign market. Component companies also follow the
international business activities of their main customers, to ensure competitive supply
and take advantage of the markets opened by their customers.
b.
Attacking a competitor's domestic market. Companies often open businesses abroad
where the domestic market of their main competitor is, with the intention of occupying
These key competitors are protecting their key markets, so they cannot concentrate on
the company's domestic market.
c.
Using overseas production to lower product costs. Companies seek to source products or
components from overseas in order to lower the cost of producing their products. Many
countries offer the concept of export processing zones or in-bond plants so that
companies can use these facilities to manufacture products with raw materials or
components exported to the country without import duties, provided that the finished
products are for export. In-bond plants are a special type of export processing zone when
there is an agreement between two countries, so that the finished products exported to the
country of origin are also not subject to import duties.
3. Protect foreign markets.
Export markets are generally not sustainable, as countries often seek to attract direct
investment, especially for products that have already achieved high sales in the country.
Various reasons encourage companies to shift from export mode to direct investment,
including foreign exchange shortages, the need to develop downstream markets, increasing
protectionism.
Many developing countries suffer from foreign exchange shortages, so they try to
reduce imports. This often forces companies to make direct investments to protect the market
for their products in the country. Increased competition can also encourage companies to
develop downstream markets, thus ensuring a market for its products at a fair price. Despite
the promotion of the concept of free trade, most countries continue to argue that it is better to
be an exporter than an importer, better to fulfill their needs with domestic production than
with imports. This leaves companies with no other option than direct investment in the
country to protect their foreign markets.
4. Ensure the availability of raw material supply:
Not many developed countries are blessed with abundant natural resources to supply
raw materials for their industries. The abundant natural resources are found in developing
countries. Therefore, to ensure the availability of these raw materials, many companies are
forced to invest abroad, especially in developing countries.
5. Acquiring Technology and Management Skills :
One of the main reasons why companies from developed countries invest more
in other developed countries is to acquire technology and management skills. This is often
cheaper than acquiring them through licensing or direct recruitment.
6. Geographic Diversification
Demand for a product in a country generally experiences seasonal cycles. Therefore,
many companies use an international geographic diversification strategy to stabilize their
sales and earnings.
7. Meeting Management's Ambition for Expansion
Shareholders generally want a fast-growing company, so this encourages company
management to expand. Domestic markets are often saturated, so overseas markets are an
option to expand quickly.
LESSONS FROM THE HISTORY OF INTERNATIONAL BUSINESS
BEFORE AND IN THE 20TH CENTURY:
International business activities have long been practiced by the inhabitants of this
world. History shows how kingdoms rose, countries became advanced because of
international business. On the other hand, history also shows that the collapse of an empire or
country was also due to the incompetence of the country in managing its international
business activities.
The early Roman Empire was an early example of the development of a state through
its links to international business, and collapsed as many of the states that had joined Rome
realized there was no longer any benefit in joining Rome. Rome managed to unite many
countries politically with the Pact Romana, which was the recognition of each region of
Rome's power and the concentration of power in Rome, the use of the same currency in all
regions controlled by Rome, the enactment and application of the same laws in all regions
controlled by Rome, the establishment of various regions of trade places so that business
activities can develop in each region, and the construction of a sophisticated communication
system in its day that was able to connect all regions of Rome.
The Roman Empire collapsed because corruption left the elites in Rome with an
abundance of wealth, while the people in the regions grew poorer, and realized that there was
no benefit for them to remain in the Pact of Romana. The lesson learned from the history of
the Roman Empire is that a country can develop economically through international business
activities. Another lesson is that a unitary state can only exist if each region within the state
benefits from being within the state. Another lesson is that corruption by the elite in a country
will destroy that country, even a country that has advanced in all fields.
The rise of the British Empire, which displaced Spain and Portugal to emerge as a
superpower in the early 19th to mid-20th centuries, is another example of the need for a
country to boost its international business. During this time, the United Kingdom was known
as a nation that ruled the oceans with a navy that was far larger than any other navy in the
world at the time. The famous motto was that the sun never set on the emporium of Great
Britain. This was because British colonies were spread all over the world, so that if in one
colony the sun went down, then in another colony the sun rose, and so on throughout that
time.
How did the British Empire become such an emporium? It was achieved through the
force of arms to control so many colonies around the world, the systematic control of each
colony, and a world market open to intensive trade by Britain, supported by efficient
transportation. The collapse of the emporium Great Britain's unchecked spending on the
ruler's personal interests meant that Britain could not afford the bureaucracy of controlling
the colonies. The lesson learned from the British emporium case is that international business
can advance a country, but it needs to be supported by a strong government and military
force. Another lesson is that a country that has successfully advanced with international
business activities can easily collapse if corruption spreads in the country's government.
The transformation of the Netherlands from the poorest country in Europe to a
wealthy nation is another example in history of the importance of international business. The
establishment in 1602 of the V.O.C. (Vereenigde Oostindische Companie), the East India
Trading Office, a Dutch trading company, which carried out international trade specialized in
products from Indonesia, made the V.O.C. a multinational company at the time, and
supported the prosperity of the Dutch state. Although V.O.C. later went bankrupt due to
massive corruption by the company's management, the Dutch government took over all
V.O.C. activities and later even controlled the whole of Indonesia as its colony. The
colonization was successful because of a power struggle between Indonesian leaders,
followed by a tactic known as divide and rule. All of Indonesia's natural resources at that
time, including its population, were exploited to support Belanda's international trade
activities, making Belanda a prosperous country until now.
Indonesia's independence has deprived the Netherlands of the opportunity to further
exploit Indonesia, what is unfortunate for Indonesia is that the 350 years of colonization has
left a mental damage to the Indonesian population especially in terms of self-confidence,
which continues to remain until now. Lessons that can be learned from the case of
The V.O.C. and the Dutch colonization of Indonesia is that international business has
prospered companies and countries, but corruption by company leaders will destroy the
company. Another lesson is that a country can be used by another country to prosper, if the
leaders of the country being used continue to fight over power and enrich themselves.
America's rise to become the most powerful country in the world today in all respects
began with the completion of World War II in 1945. By participating in World War II after a
long war, the USA managed to become one of the victorious countries that suffered
practically no damage to its infrastructure and economy. This was supported by the USA's
economic development strategy of implementing the Marshall Plan for Europe and the
McArthur plan for Japan, which rebuilt all the countries in the world that had been devastated
by the world war. These measures made the USA the largest country in international
business. This is also supported by the fact that the US dollar is the only currency that can be
accepted by every country in the world, which continues until now. In addition, the inclusion
of USA values in the culture of every country in the world also supports the success of USA
international business so that making the USA the country with the highest GDP (Gross
Domestic Product) in the world before being overtaken by China today. The lessons learned
from the US case prove that international business can prosper a country, and this can only be
achieved with the right business strategy.
PERIOD FROM THE MID-20TH CENTURY TO THE PRESENT:
From the mid-20th century until now there has been a phenomenon of the rise of the
countries that lost World War II, namely Japan and Germany, to become the strongest
economies in Asia and Europe respectively. This prosperity is mainly due to the success of
companies in these countries in their international business. Another phenomenon is the rise
of China, which began in 1980 to strategically develop its international business with the
concept of China Incorporated, which mimics the successful Japanese concept with the
concept of Japan Incorporated, and followed by South Korea with Korea Incorporated. This
concept is that in international business, a country must view it as a strategic move to prosper
its country, and this can only happen, if the companies in the country operate as a mutually
supportive unit, thus making it a competitive force of the country. The lesson to be learned
from this modern-day case is that the economic development of a country can only be done
through international business. These international business activities can no longer be
carried out by the government or by companies themselves, but are carried out by companies
with the implementation of business strategies and supported by government policies that
enhance the country's competitive advantages.
In addition to examples of successful countries prospering through international
business, there are also examples of economic crises in the world, such as the monetary crisis
that became an economic crisis in Asia and Russia in 1998, the world financial crisis that
began in 2008, and the European economic crisis in 2012. All of them show that international
business also results in the interdependence of countries in the world, so that a crisis in one
country can easily spread to other countries.
History has taught us several important things, namely the importance of international
business activities for a country, and that there is great interdependence between countries in
the world. It has also taught that a country's ability to succeed and withstand the negative
cycles of the world economy depends on its ability to develop its business competitive
advantages and translate them into an appropriate business strategy.
WORLD INTERNATIONAL BUSINESS ACTIVITIES
INTERNATIONAL TRADE:
The importance of international business can be seen from the facts of the development
of international trade and investment in the world. World international trade has grown very
rapidly from 1990 to 2005, both exports and imports by countries in the world. Although
since 2005 until now the average growth has fallen, both exports and imports, but the
absolute value of exports and imports continues to increase, as can be seen in the following
table. It is estimated that world international trade will continue to increase in the future.
If until 2005 international trade was still dominated by developed countries, then since
then, the contribution of developing countries has increased rapidly, approaching the level of
developed countries. This can be seen in the following table below. The growth rate of
international trade of developing countries is much higher than the growth rate of developed
countries. Thus, it is estimated that in the following years, the contribution of developing
countries will be closer to and most likely even surpass the international trade of developed
countries, although at that time many developing countries will be more worthy of being
called developed countries.
The Role of Asian Countries in International Trade:
The current development of world international trade is often attributed to the
contribution of developing Asian countries, particularly some East Asian countries, Southeast
Asia and India. Table 1-3 and Table 1-4 below show the export and import data of these
countries.
A spectacular phenomenon is shown by China, which in 30 years from a country with
an export value equal to other Asian countries has managed to become the world's largest
exporting country. The data becomes more It is spectacular when Hong Kong and Macau
data are combined, because since 1997 Hong Kong and Macau have actually become part of
China again. This makes China the world's largest exporter and importer. This spectacular
performance was followed by Korea and other countries.
Two ASEAN countries that are less involved in international business are Indonesia
and the Philippines. Indonesia is a particular phenomenon, as it is known as a country with
abundant natural resources, with a very large population, and thus a very large domestic
market. With abundant inputs, and a large domestic market, it is not difficult for Indonesian
firms to achieve economies of scale so that they can be competitive in exports. On the other
hand, Indonesia's import data is also below that of other ASEAN countries, except for
Vietnam and the Philippines. With export data also low, this shows Indonesia's lack of
involvement in business international.
Although the contribution of Asian countries to international trade has increased
significantly, until now international trade is still controlled by developed countries, mainly
in North America and Europe. The countries that control world international trade can be
seen in Table 1-7 and Table 1-8 below. China, Korea and Singapore are developing countries
that have made it into the group of countries that control world international trade. China is
the only developing country that exceeds all developed countries in the amount of
international trade.
In order to understand a country's actual position in international trade, as well as its
potential for advancement, it is necessary to know detailed data on the types of products it
exports and imports. An analysis of the breakdown shows that developed countries export
their advantages in technology and advantages in the production of agricultural and livestock
products. The industrialization of agriculture and livestock in developed countries has
improved their competitive ability to dominate exports of these products. Developed
countries mostly import raw materials as inputs for their industries, or import products that
need to be manufactured labor-intensive. An analysis of the detailed export and import data
of China and Indonesia shows contrasting data. China exports a wide range of products, but
mainly from processed industries that are not based on cheap labor. China does not export
raw materials, but exports downstream industrial products. The largest imports in the world
by the country are mostly imports of raw materials and production equipment. In contrast,
Indonesia is a country that relies on the export of raw materials from its abundant natural
resources (which are not renewable resources), and products that rely on cheap labor.
Meanwhile, Indonesia's imports are mainly consumptive imports and components for the
industry to continue running. Thus, it is actually very easy to predict the fate of China and
Indonesia in the future.
International trade activities are not only goods, but also services. One service trade that
is attractive to many countries, especially developing countries, is tourism. Many countries
argue that tourism provides enormous potential to boost a country's economic growth through
international trade. Tables 1-9 below provide data on the number of tourists visiting a country
and spending while in the country, for the countries with the highest number of tourists in the
world and ASEAN countries.
China has again become the world's largest exporter of tourism services when Hong
Kong and Macau, which are part of China, are included in mainland China data. The country
has even surpassed France, which until 2000 still dominated the world tourism market.
However, in terms of the amount spent by tourists, the USA is still the world's highest. The
success of Turkey, which in six years has managed to double the number of tourists coming
to the country, is interesting to study. Similarly, Malaysia's success has far surpassed all other
ASEAN countries. Although Indonesia has managed to increase Indonesia has also almost
twice as many tourists visiting the country in the past six years, but just like for goods,
Indonesia's performance in tourism services is also a cause for concern. Indonesia is a
country with a cultural product that is richer than many ASEAN countries, with natural
resources that far surpass other countries, but in the tourism industry it is far behind Malaysia
and Thailand, and even the island nation of Singapore.
INTERNATIONAL INVESTMENT:
International business is international trade and investment. International investment
can be in the form of foreign direct investment, or portfolio investment. International
investment is also growing very rapidly, both inbound and outbound investment by countries
in the world. However, from Table 1-10 below, since 2005, it can be seen that the growth rate
of international investment has started to decline, both inbound and outbound. This trend is
expected to continue, although in absolute terms the stock of international investment will
continue to increase. This can be seen in Table 1-10 below.
In terms of international investment, although both incoming and outgoing direct
investment from developing countries is increasing steadily, both incoming and outgoing
investment remains heavily dominated by developed countries. World Stock of International
Investment - Incoming and Outgoing Countries (in US$ billion at prices and current
exchange rate)
International investment can be divided into direct investment and portfolio investment.
While both forms of investment are beneficial and necessary for each country, it is direct
investment that is believed to be directly beneficial for a country. Tables 1-12 and 1-13 below
show the value of the stock of direct investment in and from some ASEAN and East Asian
developing countries.
Since the early 1980s, Hong Kong & Macau have been part of the country's stock of
inbound and outbound investment. This continued and increased rapidly after Hong Kong
and Macau became a special region of China, so that actually in the ASEAN and East Asian
developing countries group, China is the largest recipient and perpetrator of international
investment. Singapore has also been a significant country in this group from the beginning in
terms of international investment both in and out of the country. Indonesia with its abundant
natural resources deserves to be significant in direct investment into the country. However,
outbound direct investment from Indonesia is negligible, indicating that international
business is not well understood in Indonesia.
Although the development of direct investment in developing countries is increasing
rapidly, however, developed countries still make the largest contribution to direct investment.
In this case, the U.S.A., U.K. and France are the three largest recipients of international direct
investment, while for the largest outbound international direct investment, the U.S.A., U.K.
and Germany. This fact shows that developed countries have more ability to make direct
investment to countries in the world, both in terms of funds, technology, and business
management. Similarly, developed countries are preferred by countries in the world for
international investment purposes. This fact shows that developed countries are more
attractive as markets, or available resources, as well as the availability and progress of
infrastructure that supports business activities compared to developing countries. Tables 1-14
and 1-15 provide such data.
Emerging Countries:
Brazil, Russia, India and China are often referred to as emerging countries, which are
countries that are expected to become developed countries in the near future. The four
countries have various characteristics of developed countries, although not yet fully. The
prominent characteristics are the large GDP, economic level growth and industrialization
independently at a rapid pace, thus playing an important role in the world economy. It is clear
that China, even without taking into account Hong Kong and Macau, is the most advanced of
the BRIC countries, and far surpasses the other countries in its international business
activities. It can be expected that in the not-too-distant future, China will be classified as a
developed country. The performance of these countries in international business is shown in
Tables 1-16 and 1-17 below. Actually, nowadays, in addition to the BRICs, there are also
emerging countries introduced as BRICS, namely Brazil, Russia, India, China, and South
Africa. Despite this, however, South Africa's achievements are far behind those of the other
countries. The criteria for including South Africa in the group of emerging countries is
unclear, as the country does not stand out in terms of area, in terms of natural resource
wealth, in terms of economic performance, in terms of population, and so on.
GLOBALIZATION:
DEFINITION OF GLOBALIZATION:
International business has been growing rapidly over the past few decades, and many
argue that this is the era of globalization. In this era, the fundamentals of the world economy
have changed drastically. The national economy of each country can no longer stand alone,
isolated from the influence of other countries with barriers to international trade and
investment in the form of distance, time, cultural differences, government regulations and
business systems. The world is in a situation of diminishing barriers to trade and investment
across national borders. Distances between countries have closed due to the development of
transportation and telecommunication technologies, human needs across countries in the
world are increasingly similar, national economies tend to merge into an integrated
interdependent global economic system. This ongoing process is known as globalization.
Globalization has created a tendency for interdependence among international
institutions and businesses in economic, cultural, political and technological aspects.
Globalization has made national borders less relevant, causing the flow of goods, services,
capital, people, and ideas to flow across national borders more easily. Globalization is not
only about business, but also about all other aspects of life. The main aspect of globalization
is economic globalization, which drives globalization in knowledge, in law, culture, politics,
and so on. Therefore, globalization is generally defined as economic globalization. Economic
globalization is defined as the acceleration of production, trade and investment activities
across national borders. Globalization is also defined as the integration of markets, countries
and technologies, allowing individuals, companies and countries to interact around the world
further, faster, deeper and cheaper than ever before. Economic globalization is driven by
international corporations and financial institutions that facilitate an integrated and
interdependent global economy. In modern times, states no longer conduct economic
activities directly, hence the saying that it is not governments that prosper a country, but
businesses.
Business globalization mainly concerns the business functions of marketing and
production. Market globalization is concerned with the convergence of consumer preferences
in the market. This trend concerns all products, both industrial and consumer goods, as well
as services. This has led to the creation of global products, i.e. products that are marketed
worldwide without significant change. The characteristics of many markets are thus global
products and global competitors. Market globalization is important for international business
because of the benefits that can be gained by companies doing international business.
Some of the benefits that can be obtained by companies that sell global products are:
lower marketing costs, new market opportunities, and balanced sales levels. With a global
product, marketing costs will fall due to the achievement of economies of scale. A global
product will be able to enter many markets in the world, thus creating new market
opportunities. Companies selling global products will be able to balance sales levels because
the market size in different countries usually differs in the time of purchase, thus avoiding the
accumulation of sales or the lack of sales at a certain time. However, total convergence in the
world market is not possible, so it is often necessary to change products to suit the needs of
each country.
Globalization of production means the spread of production activities to locations in
any country that can help companies achieve minimum cost or maximum quality. The
benefits that can be obtained by globalizing production include: access to low-wage workers,
access to technological mastery, access to production process inputs. Each country is
different in wage levels due to different costs of living, so with globalization of production
companies can choose countries with low wage levels, so that the production costs of their
products can be low. Many countries have technological skills that are not possessed by the
country of origin, so that Globalization of production allows firms to acquire these skills.
Globalization of production also allows firms to obtain inputs to the production process, such
as raw materials, components that may not be available in the home country or can be
obtained at a lower cost in another country.
FACTORS DRIVING GLOBALIZATION:
Several factors are believed to drive the globalization of corporate business activities.
These factors are mainly technological factors, especially the development of transportation
technology and computer and telecommunications technology. Today's transportation greatly
facilitates travel between countries and regions in the world, thus accelerating introductions
between nations in the world and shipping goods around the world. Computer and
communication technology has facilitated socialization and communication between nations
without the need for travel, and has even encouraged the development of trade through
electronic means, known as e-commerce.
Other factors include political factors, namely the trend towards unification and
socialization of the global community. This happens both naturally due to the ease of
communication, socialization and travel by the nations of the world, as well as by political
developments by the governments of countries that are aware of the benefits for their
countries to be part of the world, and not isolated from other countries.
The recognition by each nation of the other has led to a convergence of lifestyles and
consumer needs. This has led to the needs of people in the world becoming more and more
diverse kin homogeneous, both in physical and other needs, tastes are increasingly similar, so
the market is moving towards a more homogeneous market.
Markets that tend to be homogeneous make the demand for a product increase rapidly.
On the other hand, there are differences in the economic strength of the population in each
country, while the increase in demand is mainly due to the creation of needs in developing
countries, with a much larger population than developed countries. This situation means that
in order to meet the increased demand, it is necessary to price products lower than usual. For
this reason, businesses need to achieve economies of scale and obtain their product supply
through international outsourcing, which is the procurement of goods, components, etc. not
by producing them in the company's home country, but from other countries. This usually
provides a more efficient supply than doing it in-house.
Increased business activities in many countries have caused the intensity of competition
in the domestic markets of various countries to increase. This is one of the factors driving
further business globalization, as companies seek to gain competitive advantages in their
business competition.
Globalization Index:
While it is recognized that globalization has taken over the world, it is a fact that
countries differ in their level of globalization. An index has been compiled to be used as a
measure to compare countries based on their level of globalization. The ranking of each
country is determined based on a compilation of various variables categorized into economic,
social and political dimensions. Economic dimension variables include: trade, foreign direct
investment, portfolio capital flows, and income from investments abroad. Social dimension
variables include: tourism and overseas travel, international telephone relations. The political
dimension consists of: membership in international organizations, financial contributions and
workers in international bodies, ratified international treaties, change of government.
Table 1-18 provides a ranking of countries based on the globalization index, as well as
for each dimension of the globalization index. The list of countries includes ASEAN
countries, and some leading countries in East Asia, and the country ranked number 1 in 2013.
From the table, Indonesia is at the second lowest rank after Vietnam. This indicates that
Indonesia is less active in participating in globalization. In the economic dimension, the low
ranking, although still above China and Japan, means that the Indonesian economy is not
much dependent on international trade and investment. Contrary to popular belief, Japan and
China are less dependent on international trade and investment than Indonesia. In the social
dimension, Indonesia ranks at the bottom of all countries in the table. This indicates that
Indonesia does not socialize much with the rest of the world. In contrast, in the political
dimension, Indonesia ranks quite high, exceeding all ASEAN countries, and only below
Korea and Japan from other Asian countries. This indicates that Indonesia is quite involved in
international politics. This globalization index can help understand the behavior of each
country in responding to globalization and the extent of its involvement in globalization in
the economic, social and political dimensions.
THE DEBATE ON GLOBALIZATION:
Globalization has meanings and impacts that can be interpreted differently by each
individual or institution. A business may see globalization as an opportunity for greater
profits or sales, or as a threat to its business activities. A company employee may see
globalization as an opportunity to be able to work in another country, or as a threat to the
possibility of losing his job. A country may see globalization as an opportunity to take
advantage of globalization for its economic development, or see it as a threat to its economy,
sovereignty, culture, and other aspects of life.
Economic globalization not only affects the economy of every country in the world, but
also has political, social, geographical, cultural and environmental implications in every
country in the world. With such huge implications covering all aspects of human life,
globalization itself has been the subject of debate for a long time. The debate has mainly
taken place between parties from developed countries and parties from developing countries.
The pro-globalization side argues that globalization is an opportunity for the economic
development and prosperity of every country in the world. With globalization, various
developments that have been obtained in other countries can be obtained by a country, so that
they can be used to increase economic activity and prosperity in that country. Globalization
also expands the potential market for products and also expands the potential supply of
products for companies in a country. As such, the economic productivity of the country in
question will increase, as will its contribution to increasing the productivity of the world
economy. As economic productivity increases, prices tend to become lower, which is
beneficial for consumers in general. The openness of the market to supplies from various
sources makes more product choices available to consumers.
Another advantage of globalization is that it enables the transfer of technology to
countries that do not have it. Since globalization also opens up opportunities for capital flows
and the availability of capital in different countries to be used by businesses in other
countries, businesses can get the opportunity to access funds from abroad, which may not be
sufficiently available in their own country. Differences in interest rates across countries also
open up opportunities to obtain funds at a lower cost. With globalization, the ideologies of
democracy and freedom will become known to many countries that may be used to being
governed without democracy or freedom. The ideology of democracy and freedom introduces
the idea that the military should stay out of politics, so there is no longer a conflict between
the military and politics. Globalization also brings positive ideas and values for the
development of moral values in a country. This will ultimately support the development of
life in a country for the better.
In general, developed countries support globalization of the world. However, there are
also those in developed countries who oppose globalization, especially those who are
disadvantaged by globalization. With efforts to lower costs production, and market entry
efficiently, many companies in developed countries are moving their activities to developing
countries. This means that many workers lose their jobs. There are also those who think that
in the long run, business activities will damage the environment, which will ultimately harm
the lives of all people in the world. Globalization will encourage economic activities in many
countries that tend to ignore efforts to maintain environmental sustainability, resulting in
accelerated environmental damage accompanying globalization.
Opponents argue that globalization poses a threat to a country's prosperity, threatens a
country's political sovereignty, threatens cultural integrity and accelerates environmental
degradation. Many developing countries fall into the category of those opposed to
globalization, although many also support globalization.
Threats to the prosperity of a developing country can occur if the country is unable to
take advantage of globalization, and instead becomes a market for companies in other
countries, because consumers in developing countries usually prefer products from abroad. In
addition, the prosperity of a developing country can be threatened if local companies are
unable to compete with foreign companies and often have to close their businesses, causing
many workers to lose their jobs.
The threat to prosperity is not only in the short term, but can be a long-term problem for
the country concerned. The inability to compete can lead to local companies being acquired
by foreign companies, and if this becomes widespread, then the country will be left with no
choice but to move forward. These countries do not have significant local companies, so their
economic activities are practically controlled by other countries. This means the destruction
of the national industries of developing countries. Such a situation can jeopardize the
country's political sovereignty. Control of a country's economy actually means control of its
politics.
Globalization will also lead to a faster introduction of cultures from other countries.
Each country's culture is different, and these differences will enrich each other. However,
each culture has its negative and positive elements, both in values, norms, as well as in
manners, dress, and artistic expression. People in developing countries tend to adopt negative
cultural elements more easily and reject positive ones. This will unwittingly harm the cultural
integrity of the developing country.
The environment can be threatened by globalization, mainly due to the fact that tropical
forests are the lungs of the world, and most tropical forests are located in developing
countries. In order to prosper, forests are seen as a cheap and easily available natural resource
that can be used for business activities. This has led to massive destruction of forests in
developing countries, both by local companies and foreign companies due to the huge
demand for forest products from the world market. In addition, the demands for waste
management in developed countries have become increasingly stringent, resulting in very
high waste management standards being required, which means increased production costs.
On the other hand, in developing countries, both regulations and implementation are On the
one hand, this is beneficial for developing countries, as it provides employment and tax and
other revenues for the government. On the one hand, this is beneficial for developing
countries, as it provides jobs, and tax and other revenues for the government. On the other
hand, it accelerates environmental destruction in developing countries.
While globalization brings the ideology of democracy and freedom which should be a
positive thing for a society, in many cases this is not the case. What is often forgotten is that a
democratic system of government is good for business, but it requires an advanced level of
business environment factors in the country. These factors include legal factors, moral
factors, cultural factors, political factors, and so on. Developing countries generally do not
have a sufficient level of progress in these factors to ensure true democracy. This often results
in democracy being ruled by corrupt and totalitarian political elites who pursue the interests
of their ruling groups in the name of democracy and freedom.
One of the drivers of globalization is multinational corporations. Many of these
companies are so large that the total revenue in a single operating year of each company is
even greater than the GDP (gross domestic product) of many countries. With such great
economic power, many multinational corporations will be able to impose their will on
governments in developing countries, which are less able to do so economic power against
these multi-national corporations, as well as corrupt legal and political systems. It follows
that through globalization, many developing countries will be vulnerable to exploitation by
multinational corporations. The lessons of the 350-year colonization of Indonesia by the
Dutch show that this fear is not imaginary.
The debate on the pros and cons of globalization continues to this day. One thing that
all parties, both cons and pros, should realize is that globalization cannot be stopped or
reversed. World development will continue to drive globalization. Many countries realize that
the problem is not stopping globalization, but how the flow of globalization can be controlled
so that it does not harm and actually provides benefits. Some countries understand that
managing a country is primarily managing a business. For businesses, globalization is just a
phenomenon of an external factor faced by businesses. The governments of some countries
have successfully formulated and made companies in those countries execute their business
strategies by utilizing globalization for the prosperity and progress of their countries. Many
countries have become indisputable examples, including: China, Singapore, Korea, Taiwan,
Thailand, Malaysia.
BUSINESS ENVIRONMENT:
Business Environment Factors
Business activities are not carried out in a vacuum, but in an environment. An
understanding of the business environment is an absolute requirement for a company to
Success. The business environment is the environmental factors outside the company, and
generally cannot be controlled by the company (uncontrollabe forces). The external
environment can be seen as consisting of economic and socio-economic, monetary, physical,
political, legal, socio-cultural, technological factors and so on depending on how each
company thinks about the factors that are crucial to its activities. Understanding the business
environment is an absolute requirement for a company to succeed. These environmental
factors determine the product needs of a society, the conditions of consumers and how to
meet them, the resources that can be used by businesses, how business activities can be
carried out, and the extent to which business activities can be carried out profitably.
Economic and financial factors can be recognized by the variables that economically
affect a company's ability to do business. Socioeconomic factors can be understood by the
characteristics and distribution of a country's population. Monetary factors are how a country
determines and manages its monetary system. Physical factors are the natural conditions of a
country, such as location, topography, climate, natural resources of a country. Political
factors are the elements and political conditions in a country, such as ideology, form and
manner of government, nationalism values, how to relate to other countries, and so on. Legal
factors are how the laws apply in the country and their application, especially those
concerning business activities. Socio-cultural factors are elements of culture both
fundamental in a society's assumptions about life itself, as well as values, norms, behaviors,
beliefs, and elements of the way people live and express themselves. Technological factors
are skills The techniques and equipment a country has that affect how resources are converted
into products.
The influence and role of each of these external forces varies from country to country.
This is because the value and importance of each force varies for different societies. In
addition, each force will always change, and these changes will vary in magnitude and speed
across societies. The difference is also because each external environmental factor is actually
interdependent. A poor society will find it difficult to have moral cultural factors, political
factors that are not corrupt, and so on. Understanding the role and influence of external
factors in another country is not easy, because in addition to the difficulty of obtaining correct
data and facts about each factor, it is also difficult to understand correctly. This is mainly due
to the difficulty of understanding factors from other cultures, and the human tendency to use
self-criterion to judge things, which is the criterion of using one's own standards in judging
other people or other societies.
INTERNATIONAL BUSINESS MODEL:
The foreign and international environment is difficult to understand, due to the various
obstacles that must be faced in trying to understand each factor in the environment.
Therefore, it is understood that doing business in the current era of globalization is not easy,
even for companies that do not do international business.
International business is different from domestic business, as a company operating
across national borders has to face the forces of three environments, namely:
(1). the domestic environment where the company is domiciled (2). the overseas environment
in the country where the company's market and/or operations are located, and (3). the
international environment, which is the world environment that is the interaction of the
domestic environment and the destination's overseas environment with all countries in the
world. Domestic businesses face only two environments, namely: (1). The domestic
environment, where the company's domicile and markets and operations are located, and (2).
The international environment, which is the world environment.
PRACTICE QUESTIONS
1.
In international business there are the terms MNC and MNE. Explain and what are the
advantages and disadvantages of each?
2.
Give your opinion on the importance of learning International Business.
3.
Define the forms of international business activities, and give examples.
4.
One of the benefits of international business is protecting markets, profits and sales.
Explain what the government can do to protect the domestic market.
5.
Designate and explain 5 lessons learned from the history of international business.
6.
Explain the positive and negative sides of globalization for the Indonesian economy.
7.
If company A from Indonesia wants to do international business with other countries,
what challenges and environment should company A face? and give examples!
