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BUSM1227 Semester 2 2014

Assessment 1 – Assignment - Case study

• Type: Individual • Value: 50% • Word limit: 2500 words (variation within 10% more or less is allowed) • Due: To be announced

Aims and background Choosing an appropriate market entry mode is an important decision-making process for international businesses when they expand their business to foreign markets. Appropriate decision on entry mode is more likely to occur when solid analysis of the firm’s and the target markets’ situation are in place. By studying a real world case, this assignment is designed to help you consolidate your understanding on entry modes, the environment analysis associated with entry modes, and the strategic consideration behind entry mode choices. This activity also aims to sharpen your analytical skills and abilities for problem analysis and solving.

Procedures and questions: 1. Choose a real company from an automobile (car) industry which is involved in international business. 2. Identify an entry mode that has been used by the selected company when expanding its car business to a foreign market location. The identified case should be from 1990 and onward. 3. Answer all of the following questions:

Question 1) Is this entry mode appropriate for the target foreign market? Why? Answer this question by analysing: • Strategic Consideration: a) Is this entry mode in line with the company’s then strategic direction? why?; b) Do you think the level of control, risks, return and integration associated with the entry mode is appropriate for the company’s strategy? • Environmental factors: PESTEL Analysis of the foreign market location. You only need to analyse any 3 PESTEL factors that you think are most related to your case. Note you must analyse how the entry mode suits these 3 PESTEL factors. • Whether the timing of entry and the scale of the entry are appropriate? Why

Question 2) Based on above analyses, what recommendations would you make to improve this entry?

Format This assessment task should include the following sections: • Title page (title of your report, your name, student number and word count - References are excluded from the word counts) • Introduction • Answer question 1 in this section. You need to design a heading for this section and can make your own sub-headings. • Answer question 2 in this section. You need to design a heading for this section and can make your own sub-headings. • Conclusion • Reference List (is excluded from word counts)

Guidelines

1. The core of this assignment is to assess your level of mastery of the subject matters and your analytical skills in relation to market entry modes. Being descriptive is NOT appropriate for this assignment. 2. Keep the Introduction and Conclusion short (maximum 200 words each) and focus on the analysis.

Other requirements

· A minimum of six (6) academic journal articles must be read and cited.

· The assignment must be well-structured and well-presented.

· The clarity of expressions together with the appropriate use of grammar, spelling and punctuations are important to maintain.

· Any use of comments, information, data or quotations from others (books, journals, newspapers, web etc.) must be cited using Harvard referencing style.

· The 12 point font in Times New Roman should be used throughout. Appropriate spacing (1.5 lines) and margins on all sides (at least 2 cm) need to be maintained.

· Number each page.

Assessment Criteria • Level of mastery of the subject matters • Quality of analysis and justification • Academic writing clarity, logic and skills • Quality, relevance and sufficiency of references • Format • Presentation

IB 5/For expert/IBtopic1.ppt

International Business: Context (I)

Business College

School of Management

Key Learning Objectives

That globalisation is the key feature of the international business context. However

There is no precise definition of globalisation – in fact there is considerable conflict

Debate about whether globalisation is NEW, POSITIVE

There are winners and losers

Business, Politics and knowledge – the powerful control the agenda and the production of legitimate knowledge.

Key Questions

What are the key features of the context?
What is globalisation?
Is globalisation new?
Who are the winners and losers of this global context?

What is globalisation?

There is no agreed or consistent definition but key features

One world

Intensive and rapid flows cross border flows (eg products, finance)

Not just economic

Implications for nation states (countries) – a loss of power?

Eg Anthony Giddens, Peter Dicken, Manuel Castells.

http://www.youtube.com/watch?v=lp4znWHvsjU

Globalisation – a definition

"Globalisation is about growing mobility across frontiers - mobility of goods and commodities, mobility of information and communications products and services, and mobility of people" p195

Robins, K. (2000) Encountering Globalization in Held, D. and A. McGrew, Eds. (2000). The Global Transformations Reader.

Globalisation: Aspect 1

Globalisation: Aspect 2

Globalisation: Aspect 3

Globalisation and Business

The international dimension of business – due mainly to globalisation – has become a major challenge to governments, institutions and organisations.

examples?

This helps explain why the area of internatioanal business (IB) and international management (IM) is becoming more important within the academic setting.

Activity 1:Group Discussion (15 Mins)

Globalisation is an important concept. In your team, please discuss 3 aspects of globalisation that affect business organisations.

- What are they?

- Are they positive? Negative?

- Why?

RMIT University

School of Management

Globalisation of Business

Two components:

The Globalisation of Markets

The Globalisation of Production

(Hill et al, 2008, p.9)

School of Management

This slide offers a definition for globalization; it highlights that globalization affects two primary areas.

RMIT University

School of Management

Globalisation of Markets

Diversity in ‘Doing’ Business

The Rise of B2B

The Complex Roles of ‘Global’ Actors

Adaptation VS. Standardisation

School of Management

Some problems occur when companies begin operating globally. These include: very significant differences still exist among national markets along many relevant dimensions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, business systems, and legal regulations. These differences frequently require that marketing strategies, product features, and operating practices be customized to best match conditions in a country. For example, automobile companies will promote different car models depending on a range of factors such as local fuel costs, income levels, traffic congestion, and cultural values. Similarly, many companies need to vary aspects of their product mix and operations from country to country depending on local tastes and preferences.

RMIT University

School of Management

Globalisation of Production

Refers to sourcing of goods and services from locations around the world to take advantage of Land, Labour and Capital

Competition for Resources

Increasing Roles of ‘Global’ Stakeholders

Social Issues

School of Management

The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital). By doing this, companies hope to lower their overall cost structure and/or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively.

Drivers of Globalisation of Business

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1) The Emergence of Global Institutions

Over the past half century, a number of important global institutions have been created to:

help manage, regulate and police the global marketplace

promote the establishment of multinational treaties to govern the global business system

(Cairns and Sliwa, 2008)

School of Management

RMIT University

School of Management

2) Declining Trade and Investment Barriers

During the 1920s and ‘30s, many of the nation-states of the world erected formidable barriers to international trade and foreign direct investment
Advanced industrial nations of the West committed themselves after World War II to removing barriers to the free flow of goods, services, and capital between nations.

School of Management

Discuss decline in international trade and trade barrier in different forms.

RMIT University

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Effects of Lowering Trade Barriers

Source: WTO, Global Outlook (2006)

School of Management

According to data from the World Trade Organization, the volume of world merchandise trade has grown faster than the world economy since 1950 (see figure 1.1). From 1970 to 2004, the volume of world merchandise trade expanded almost 26-fold, outstripping world production, which grew about 7.5 times in real terms. (World merchandise trade includes trade in manufactured goods, agricultural goods and mining products, but not services. World production and trade are measured in real, or inflation-adjusted, dollars.) As suggested by Figure 1.1, due to falling barriers to cross-border trade and investment, the growth in world trade seems to have accelerated since the early 1980s.

Volume of World Merchandise Exports, 1990-2013*
(Source: WTO Secretariat)

*Figures for 2012 and 13 are projections.

Merchandise Trade by region (2011-12)
(Source: WTO)

Liberalisation in Foreign Investment Regimes
(Source: UNCTAD, 2009)

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1991	1994	1998	2008
Total number of countries that changed their investment regimes	35	49	60	123
Total number of changes	82	110	145	165
Changes in the direction of liberalisation	80	108	136	262

School of Management

2) The Rise of MNCs
World’s Leading Companies: 2012 FORBES’ Ranking
(Source: http://www.forbes.com/global2000/list/)

RMIT University

School of Management

RANK	COMPANY	COUNTRY
1	ICBC	China
2	China Construction Bank	China
3	JP Morgan Chase	US
4	General Electric	US
5	Exxon Mobil	US
6	HSBC Holdings	UK
7	Shell	Netherlands
8	Agricultural Bank of China	China
8	Berkshire Hathaway	US
10	PetroChina	China

School of Management

3) Technology

Is the world flat?

Typical of the globalisation argument is Thomas Friedman The World Is Flat: A Brief History of the Twenty-First Century (2005)
Claims that there have been three eras of globalization.

Globalisation 1 - countries;

Globalisation 2 - companies;

Globalisation 3 - individuals.

http://www.youtube.com/watch?v=lp4znWHvsjU

Is Globalisation new?

How would Thomas Friedman respond?
Niall Fergusson

Not new

Some similarities (eg free trade, capital markets).

Some differences (foreign direct investment, international institutions).

Watch video

http://www.hbs.edu/centennial/businesssummit/globalization/globalization.html

RMIT University

School of Management

Implications for the Globalisation of Production and Market

Global Socio-cultural and Geo-political changes

Global Skills

Managers today operate in an environment that offers more opportunities, but is also more complex and competitive than that of a generation ago.

School of Management

RMIT University

School of Management

Changing Characteristics of the Global Economy

The Changing Nature of Multinational Enterprises (MNEs)

Examples of MNEs from the developing nations on the UN’s Top 100 list:

Hutchison Whampoa of Hong Kong, China, which ranked 16 in terms of foreign assets

TATA Group of India

PetroBra from Brazil

Petronas of Malaysia

Samsung of Korea

School of Management

Management Focus: China’s Lenovo Acquires IBM’s PC Operations

Summary

This feature explores how Lenovo, the Chinese personal computer manufacturer, is positioning itself to be a market leader in the global personal computer business. Lenovo, founded in 1984, held a 26 percent share of the Chinese market for personal computers, but wanted to become a global player. To that end, the company acquired IBM’s PC business in 2004, moved its headquarters to New York, and appointed the former head of IBM’s PC division as CEO of Lenovo.

IB 5/For expert/IBtopic2(3).ppt

International Business: Context (II)

Business College

School of Management

Key Learning Objective

To understand the ‘complexities’ and ‘roles’ of International Business Environment:

A) Political economy in International Business

B) Cultural factors in International Business

Recap

Last discussion, we examined the political-economy factors in international business environment

Changes

Patterns

Approaches

Globalisation of Markets and culture?

Workers perform the warm-up dance during the opening ceremony of the newly opened

Wal-Mart store in Shanghai in July 28, 2005.

It has agreed to cooperate with China's labor group in creating unions at its 60 Chinese outlets. [AP]

Globalisation of Production & Culture?

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School of Management

Cultural Influence on Management

Management

Function

Leadership

Decision-making

Strategy&planning

Communication

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Culture: Analytical Approach

Cultures are compared along various set of dimensions. It is useful to identify different aspects of culture. It is also useful for cross-cultural studies.

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Cultural Analysis

Hall’s Analytical Approach

Trompenaars’ Cultural Analysis

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School of Management

Edward T. Hall and Cultural Contexts
Hall, E. T. (1976). Beyond Culture, Anchor Press / Doubleday

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School of Management

Characteristics of High-Context cultures

High Context

Long lasting relationships
Wider range of communicative expressions/Implicit (throughShared code)
Verbal agreement
People in authority are personally responsible for the actions of subordinates
Resist to change

Low-Context

Shorter relationships
Messages are made explicit
Role-specific
Agreements are written rather than spoken
Change relatively easily

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School of Management

In high-context cultures …

Agreements between persons are spoken rather than written

Insiders and Outsiders are distinguished

Cultural patterns are ingrained and relatively slow to change

RMIT University

School of Management

High-Low context

In China communication tends to be very efficient because of their information-flow at work and in privacy. They discuss everything in advance and consider meetings as an official "ceremony" where the already commonly agreed decision will be announced. This is important in the way of "giving and keeping face".

The Americans and Germans in contrast inform the participating attendants in a meeting about the hard and necessary facts. The decission-making process takes place within the meeting.

(Tayeb, 2007)

RMIT University

School of Management

Space (or Proxemics)

Space: The distance people keep between themselves in various social situations.

Intimate space--the closest "bubble" of space surrounding a person. Entry into this space is acceptable only for the closest friends and intimates.

Social and consultative spaces--the spaces in which people feel comfortable conducting routine social interactions with acquaintances as well as strangers.

Public space--the area of space beyond which people will perceive interactions as impersonal and relatively anonymous.

RMIT University

School of Management

RMIT University

School of Management

Time

Time: Polychronic (P) time the involvement of people and completion of transactions rather than adherence to pre-set schedules. Appointments are not taken seriously and are frequently broken.

(as opposed to Monochronic (M) time)

Polychronic people changes plan easily.
Monochronic people adhere to plan.

Cultural Factors and International Business

Nonverbal communication

Kinesic behavior (e.g. eye contacts, body language )

Proxemics (e.g., the corner office, closeness when talking)

Vocalics/Paralanguage (e.g., the sound of silence)

Object language (e.g., Clothing/Brandname, Hairstyle)

Please observe ‘Paralanguage’ and “Kinesics’

Pretty Woman (1990)

http://www.youtube.com/watch?v=4rZJ3pBAYTk

RMIT University

School of Management

Activity 1: Hall’s Theory and its Implications for IB

Discuss the impact of

CONTEXT

TIME

SPACE

in the management of international business.

RMIT University

School of Management

RMIT University

School of Management

Theory 2: Trompenaars’ Cultural Analysis

Riding the Waves of Culture: Understanding Cultural Diversity in Business (Nicholoa Brealey, 1993)

He studied 15,000 managers from 28 countries.
7 cultural dimensions

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School of Management

Trompenaars’ Cultural Dimensions

UNIVERSALISM: belief that ideas and practices can be applied everywhere in the world without modification

Focus on formal rules and rely on business contacts

PARTICULARISM: belief that circumstances dictate how ideas and practices should be applied and something cannot be done the same everywhere

Focus on relationships, working things out to suit the parties

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School of Management

Trompenaars’ Cultural Dimensions (cont.)

Individualism: people regard themselves as individuals

rely on individuals to make decisions

Communitarianism/Collectivism: people regard themselves as part of a group

Seek consultation and mutual consent before making decisions

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Trompenaars’ Cultural Dimensions (cont.)

Specific: culture in which individuals have a large public space they readily share with others and a small private space they guard closely and share with only close friends and associates

People often are open and extroverted

Work and private life are separate

Diffuse: culture in which both public and private space are similar in size and individuals guard their public space carefully, because entry into public space affords entry into private space as well

People often appear indirect and introverted, and work and private life often are closely linked

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School of Management

Trompenaars’ Cultural Dimensions (cont.)

Neutral:culture in which emotions are held in check

People try not to show their feelings

Emotional/Affective: culture in which emotions are expressed openly and naturally

People smile, talk loudly, greet each other with enthusiasm

Neutral Vs. Affective

"When doing business with neutral cultures it is recommended to ask for time-outs from meetings and negotiations and put as much as you can on paper beforehand.
"Neutrals" tend to be reserved which doesn't mean that they are disinterested or bored. It is just a lack of emotional tone. You may experience that the entire negotiation is very focused on the object or proposition being discussed and less on you as a person.

(Trompenaars, 1993)

RMIT University

School of Management

RMIT University

School of Management

Trompenaars’ Cultural Dimensions (cont.)

Achievement

- Achievement: culture in which people are accorded status based on how well they perform their functions

Ascription: culture in which status is attributed based on who or what a person is

For example, status may be accorded on the basis of age, gender, or social connections

Time

Sequential Approach to Time: people do one thing at a time, keep appointments strictly, follow plans to the letter

Synchronous Approach: people do more than one thing at a time, appointments are approximate

Activity 2: Trompenaars’ Implications

What are the 3 key implications from Trompenaars’ Theories for the management of international business organisations?

http://www.youtube.com/watch?v=lxf14r4wCwo

Culture: Leadership in the International Context

How do leaders in other countries attempt to direct or influence their subordinates?

Are their approaches similar to those used in the United States/Turkey/Singapore?

Research shows that there are both similarities and differences – most international research on leadership has focused on Europe, East Asia, the Middle East, and developing countries such as India, Peru, Chile, and Argentina.

Activity 3: Culture and Leadership

Please watch this interview with Carlos Ghoson (CEO of Renault) and discuss 2 questions in your group.

http://www.youtube.com/watch?v=SF3W2vCH9dU

Q.1: What make Carlos Ghoson a competent trans-cultural leader in the multinational corporation context?

Q2: What are the key cross-cultural issues that may affect international business operations in your opinion? How?

Blocks to Cross- Cultural Communication

1. Ethnocentrism : Inability to accept another culture's world view;

"my way is the best."

2. Discrimination : Differential treatment of an individual due to

minority status; actual and perceived; e.g., "we just aren't equipped to

serve people like that."

3. Stereotyping : Generalizing about a person while ignoring presence

of individual difference; e.g., "she's like that because she's Asian – all

Asians are nonverbal."

4.Cultural Blindness: Differences are ignored and one proceeds as

though differences did not exist; e.g., "there's no need to worry about a

person's culture

5.Cultural Imposition: Belief that everyone should conform to the

majority; e.g., "we know what's best for you, if you don't like it you can go elsewhere."

6.Tone Difference : Formal tone change becomes embarrassing and off-putting in some cultures.

Japanese Story (2003,Dir:Sue Broks)
http://www.youtube.com/watch?v=AIQH_msbZ2o

IB 5/For expert/IBtopic3.ppt

International Business: Context (III)
Political economy

Business College

School of Management

Key Learning Objective

To understand the ‘complexities’ and ‘roles’ of International Business Environment:

A) Political economy in International Business

B) Cultural factors in International Business

Key Questions

What are ‘political-economy’ and ‘culture’ in the international business context?

To what extent can ‘politics’ ‘economy’ and ‘culture’ influence international business organisations?

RMIT University

Slide *

Political Economy

A term that stresses that “the political, economic, and legal systems of a country are interdependent; they interact and influence each other, and in doing so they affect the level of economic well-being” (Hill et al, 2008)

ASEAN Summit: Politics or Economy?

http://www.youtube.com/watch?v=FR4v-WkdbVg

Institution-Based View of Global Business
(Source: Peng et al, 2008)

Dynamic /Interaction

Industry

Conditions

& Firm-specific

resources

Formal/Informal

Constraints

Political Climate

Political regimes
Emerging countries and their political powers

Political Risks and International business

Exchange Transfer: The risk of investors being unable to make payments in contract currency as a result of the imposition of local currency controls

Sovereign Non-payment: The risk of failure on the part of a government to fulfil its loan obligations or honour other business commitments

Political Interference: The risk of government intervention in the economy or other policy areas that negatively affects business interests; e.g., nationalization and expropriation

Supply Chain Disruption: The risk of disruption to the flow of goods and/or services into or out of a country as a result of political, social, economic or environmental instability

Legal and Regulatory: The risk of financial or reputational loss as a result of difficulties in complying with a host country’s laws, regulations or codes

Political Violence: The risk of strikes, riots, civil commotion, terrorism, war or civil war

(Source: World Bank, 2012)

Activity 1: Burma: The new market?

Please watch these clips and identify ‘risks’ (and opportunities) of doing international business in Burma.

Clip 1: Inside the Secret City (SBS: 20:15 mins)

http://www.youtube.com/watch?v=GGrPJvVEG8M

http://www.nytimes.com/2013/03/24/world/asia/after-violence-in-myanmar-a-city-counts-the-dead.html?ref=myanmar&_r=0

Clip 2: Doing Business in Mynmar (BBC: 2:50)

http://www.youtube.com/watch?v=XUILurEdPWk&feature=related

Corruption and International Business

Corruption Perceptions Index 2011

http://cpi.transparency.org/cpi2011/results/

The Impact of Corruption

http://www.youtube.com/watch?v=vdXO_yPCUVE&feature=related

“Formal institutions refer to state bodies such as courts, legislatures, bureaucracies and state-enforced rules such as constitutions, laws, regulations. They are openly codified in that they are established and known through official channels.

Informal institutions are usually unwritten and are created and enforced
outside the official channels.”
(Oxfam, 2012)

Roles of Informal Political Groups

Formal Institutions

Constitution
Official Law
Regulation and Standards

Informal Institutions

Social norms
Attitudes
Morals

Informal Economy

Activity 2: Research and Discussion

Please discuss the concept of ‘informal group’ in international business. What are their impacts upon ‘international business’ in Australia or another country?

RMIT University

Slide *

Differences in Economic Development

Different countries have dramatically different levels of economic development
Two common measurements of economic development

Gross National Income (GNI) superseded Gross National Product or GNP

Purchasing Power Parity (PPP) which accounts for differences in the cost of living (Source: Peng and Meyer, 2012)

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Slide *

Differences in Economic Development: Gross National Income
(Source: World Bank, 2008)

One common measure of economic development is a country’s gross national income per head of population. GNI is regarded as a yardstick for the economic activity of a country; it measures the total annual income received by residents of a nation (GNI superseded gross national product, or GNP). Map 2.1

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Slide *

Differences in Economic Development:
Purchasing Power Parity

Country	GNI per Capita	GNI PPP per Capita	GDP Growth Rate 1995-2005(%)
Australia	$26,710	$25,480	2.6%
China	$1,100	$4,990	9.3%
Germany	$25,250	$27,460	1.2%
India	$530	$2,880	6.1%
Japan	$34,510	$28,620	1.2%
Nigeria	$320	$900	3.1%
Poland	$5,270	$11,450	4.8%
Russia	$2,610	$8,920	0.1%
Switzerland	$39,880	$32,030	0.9%
United Kingdom	$28,350	$27,650	2.8%
United States	$37,610	$37,500	3.2%

As can be seen, there are striking differences in the standard of living. Table 2.1 suggests that the average Indian citizen can afford to consume only 7.7 percent of the goods and services consumed by the average U.S. citizen on a PPP basis.

GDP 2011: World Map
(Source: World Bank, 2012)

RMIT University

Slide *

Broader Conceptions of Development:
Amartya Sen

Development should be measured less by material output measures, such as GNP, per capita and more by the capabilities and opportunities that people enjoy.
Human Development Index (HDI) measures quality of life in different nations
Based on longevity in life expectancy, educational attainment, and PPP based average incomes

The Nobel Prize-winning economist Amartya Sen has argued that development should be assessed less by material output measures such as GNI per capita and more by the capabilities and opportunities that people enjoy. According to Sen, development should be seen as a process of expanding the real freedoms that people experience. Hence, development requires the removal of major impediments to freedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as the intolerance of repressive states. In Sen’s view, development is not just an economic process, but it is a political one too, and to succeed requires the “democratization” of political communities to give citizens a voice in the important decisions made for the community.

RMIT University

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Broader Conceptions of Development: Amartya Sen

Map 2.4 – The Human Development Index, 2002. p. 65

Activity 3: HDI and International Business

Please watch this clip from the UNDP and discuss these issues in your group.

Do you agree with HDI as a measurement for economic development?

What is the implication of HDI for international business?

http://www.youtube.com/watch?v=xIbkPPkuKno

RMIT University

Slide *

Changes in Political Economy:
States in Transition

The political economy of the world has changed radically since the late 1980’s
Two trends have been evident

A wave of democratic revolutions swept the world and new players in the global productivity.

There has been a strong move away from centrally planned and mixed economies toward a free market economic model.

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Slide *

The Spread of Democracy

Map 2.5 – Political Freedom, 2004, p. 69

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Slide *

The Spread of Democracy

Main reasons account for the spread of democracy

Many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations;

New information and communication technologies have broken down the ability of the state to control access to uncensored information;

The economic advances of the past quarter century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms.

Even though democracy is advancing it is important to remind students that democracy is still rare in large parts of the world. In sub-Saharan Africa in 2004, only 11 countries are considered free, 21 are partly free, and 16 are not free. Among the 27 post-Communist countries in Eastern and Central Europe, 8 are still not electoral democracies and Freedom House classifies only 12 of these states as free (primarily in Eastern Europe). And there is only one partial democracy among the 16 Arabic states of the Middle East and North Africa, Iraq, where foreign occupiers are imposing a democratic system.

RMIT University

Slide *

The Spread of Market-Based Systems

Paralleling the spread of democracy since the 1980s has been the transformation from centrally planned command economies to market-based economies. The rationale for economic transformation has been the same the world over. In general, command and mixed economies failed to deliver the kind of sustained economic performance that was achieved by countries adopting market-based systems. Economic freedom does not necessarily equate with political freedom, as detailed in Map 2.6. For example, 3 of the top 16 states in the Heritage Foundation index, Hong Kong, Singapore, and Bahrain, cannot be classified as politically free. Hong Kong was reabsorbed into Communist China in 1997, and the first thing Beijing did was shut down Hong Kong’s freely elected legislature. (Map 2.6 – Distribution of Economic Freedom, 2005, p. 73)

The stages of economic integration

Free trade areas:

Free trade between members, different external tariffs

Little or no institutional co-ordination

Customs union:

Free trade between members and common external trade restriction

Common regulatory bodies

Common (or single) markets:

Removal of all barriers to free factor mobility

Free mobility of goods, capital, labour, and services

Greater level of regulation and strong institutions to monitor decisions adopted by member states

The stages of economic integration (II)

Economic union:

Harmonisation of economic policies (generally monetary or fiscal policy)

Members give up powers. Strong central institutions which dictate common economic policy

Complete economic integration:

All economic policy areas are harmonised

The capacity of states to implement independent policies disappears

Central institutions become the centres of economic decision-making

The expected benefits of economic integration

Cecchini report (1988). Cost saving effects:

‘Static trade effect’: benefits reaped from allowing public authorities to buy from the cheapest suppliers

‘Competition effect’: Downward pressure on prices as a result of greater competition

‘Restructuring effect’: Reorganisation of industrial sectors and individual companies as a result of greater competition

Other possible benefits:

Benefits on investment, innovation (rationalisation of R&D expenditure) and growth

Savings for the public sector (lower government subsidies for inefficient firms

Physical barriers

Custom related costs:

Customs controls, border stoppages

Paperwork and red-tape

Exchange of low-value added perishable goods suffered as a result

High administrative costs and regulatory hassles:

Higher cost of red-tape of SMEs (higher proportion of their business volume, and lack of expertise and human resources)

Physical barriers

Protected markets :

Fear of foreign dependence leads to protection of ‘national strategic sectors’

Many sectors fall under this umbrella: petrochemical industries, shipbuilding, iron and steel, tobacco, car manufacturing, telecommunications, air transport,...

Cost of protection born by the consumer:

Lack of competition and underperforming industries

Technical barriers

Different product standards and technical regulations:

Problems and additional costs for consumers

Cost for firms which had to adapt their products to different national standards

Cost premium for SMEs

Protected public-sector procurement:

Government supply and construction contrast restricted to national firms

Or technical regulations discriminating against foreign bidders

Activity 4: AANZFTA (ASEAN-Australia-New Zealand) politicaleconomy?

Please watch this clip

http://www.youtube.com/watch?v=OrNlPwNPfpg

and identify:

Potential Benefits for Australia of this FTA

Potential Pitfalls for Australia

http://www.channelnewsasia.com/video/index.php

References

Peng, M., Wang, D., and Jiang, Y. (2008). An institution-based view of international business strategy: a focus on emerging economies, Journal of International Business Studies, 39: 920-936.
Peng, M, and Wang, K. (2012). International business. Cengage Learning, Singapore: Seng Lee.
Wild, J. J., Wild, K. L., & Han, J. C. (2008). International business: The challenges of globalization. (4th ed.). Upper Saddle River, NJ: Pearson
World Bank (2012), The World Bank Blogs, available at: http://blogs.worldbank.com/psd/category/tags/political-risk

IB 5/For expert/IBtopic4 - IB theories(1).ppt

International Business: Actions
Internationalisation Theories and Practices

Business College

School of Management

Key Learning Objective

This session will help you to understand the concepts of:

1) Internationalisation of business organisations

2) Key international business theories

3) Complexities of choices and approaches in internationalisation

Key Questions

How do organisations internationalise?

How does international business manage its internal operations?

How does international business manage its external operations (e.g. relationship with the host country/communities)?

Internationalization?

BHP Expansion

http://www.youtube.com/watch?v=TiaNjJNIDkg

Pacific Brands Story

http://www.youtube.com/watch?v=BpiC-FSid7w

Goverments attitudes towards FDI

Statistics:
FDI and its relationship with Internationalisation

Statistics: UNCTAD (2009)

Activity 1: Discussion

In your opinion, what are they key factors for MNCs to invest in the new foreign market such as Myanmar? Why?

http://www.youtube.com/watch?v=kgHIVs_ECSo

Literature on MNCs and Internationalisation

Mainstream MNC Theories

After the Second World War, the rapid development of MNCs and their FDI caused widespread interest among western scholars. They adopted different research methods and created basic assumptions towards different research objects, and consequently created various MNC theories.

The Uppsala Internationalisation Model

Swedish manufacturing companies begin their internationalisation process by establishing in the Nordic countries.

According to the stage model the Swedish researchers stressed that Swedish manufacturing companies began to operate abroad in a nearby market and then slowly penetrated markets far away. This model was developed in the 1970s and has lately been criticised for no longer being relevant.

Uppsala Model

A basic assumption of the model is that lack of knowledge about foreign markets is a major obstacle to internationalization, but that this obstacle can be overcome through learning about foreign market conditions.

The firm’s own current operations are the main source of this kind of learning. In turn, this reasoning leads to a second assumption of “learning by doing” (cf. Lindblom, 1959; and Johnson, 1988).
Investment decisions and actual investment commitments are made incrementally as uncertainty is successively reduced.

The more the firm knows about a foreign market, the lower the perceived market risk will be and, consequently, the higher the actual investment by the firm in that market tends to be.

Criticisms

The Uppsala internationalisation model has been criticized as deterministic (Reid, 1981) and, if firms were to develop in accordance with the model, individuals would then have no strategic choices (Andersson, 2000).

Another bigger challenge is that today many firms simply do not follow the traditional pattern of internationalization proposed by stage theory. Some firms are international from their birth and have been called: international new ventures (Oviatt and McDougall, 1994, 1995), born global (Madsen and Servais, 1997), and global start-ups (Oviatt and McDougall, 1995).

Activity 2: Debate

The Uppsala Internationalisation model helps us to understand the internationalisation process of MNCs in 1970s-1990s. Please discuss new factors that change the validity of this concept in the contemporary international business.

Source: Adapted from Sumantra Ghoshal & Nitin Nohria, ‘Horses for courses: Organizational forms for multicultural corporations’, Sloan Management Review, Winter 1993, pp. 27, 31.

International strategy

Create value by transferring valuable core competencies to foreign markets that local competitors lack.
Centralise product development functions at home
Establish manufacturing and marketing functions in local country but head office exercises tight control over it
Limit customization of product offering and market strategy

Strategy effective if firm faces weak pressures for local responsive and cost reductions

Multi-domestic strategy

Main aim is maximum local responsiveness.
Customize product offering, market strategy including production, and R&D according to national conditions
Generally unable to realize value from experience curve effects and location economies.
Possess high cost structure.

Global strategy

Focus is on achieving a low cost strategy by reaping cost reductions that come from experience curve effects and location economies.
Production, marketing, and R&D concentrated in few favorable functions.
Market standardized product to keep cost low.
Effective where strong pressures for cost reductions and low demand for local responsiveness.

Transnational strategy

To meet competition firms aim to reduce costs, transfer core competencies while paying attention to pressures for local responsiveness
Global learning

Valuable skills can develop in any of the firm’s world wide operations

Transfer of knowledge from foreign subsidiary to home country, to other foreign subsidiaries

Transnational strategy difficult task due to contradictory demands placed on the organization

Example : Caterpillar

Why firms become multinational?
1. The OLI Paradigm (Dunning J.)

One of the dominant frameworks for explaining the existence of MNCs and the determinants of FDI
O = Ownership
L = Location
I = Internalization

*Note: The modern paradigm of OLI is well discussed in Dunning and Lundan (2008), Institutions and the OLI paradigm of the Multinational Enterprise, Asia Pacific Journal of Management, 25:573-593.

Ownership

The firm that invests abroad has a competitive advantage (to exploit) and out-compete the firms that operate in the country where the investment is done.

Economies of scale connected to large-sized company

Possess technologies that give an advantage on the subsidiary abroad

Monopolistic advantages in terms of priviledged access to inputs or outputs markets

Skills of management

Location

Advantages of the foreign location:

Different nations have different factor endowments:

Natural resources:

Cheap labour force

Skills and capabilities

Country characteristics (political stability, regulations, cultural distance)

Bolivia happens to possess up to 54% of the world's Lithium deposits

Underneath the salt lies the world's largest lithium reserves

Internalization

Internalization occurs when a firm expands its operations in another country, by acquiring the property of the assets that are abroad
Ownership of foreign assets more convenient than the market
Why?

Information asymmetries (transaction costs can be too high) -> Market failures

Keeping skills and capabilities internal to the firm

Why firms become multinational?
Ghoshal (1987)

Becoming multinational to search a competitive advantage:

National differences: Exploiting national differences in factor costs

Scale Economies

Scope Economies

1. National differences

Different nations have different factor endowments:

A firm can gain cost advantages by configuring its value chain so that each activity is located in the country which has the least cost for the factor that the activity uses most intensively

E.g. Land in Honduras, cheap labour force in China, cheap but skilled engineers in India...(changing over time)

2. Scale economies

A firm expanding its total volume of sales, reduces its average costs in a given period of time
It is thus important to expand to several markets as to produce more of a product
Higher volumes also favour experience economies (learning by doing)
However, large scale also implies higher complexity and organization is critical

3. Scope economies

Scope economies: when the cost of the joint production of two or more products can be less than producing them separately
Scope economies achieved though:

Shared equipment, brands, and other assets

Shared external relations

Shared knowledge

Main strategies for setting up subsidiaries (Dunning)

Natural-resource seeking
Efficiency seeking
Market seeking
Capability seeking

Venezuela

Activity 3: Internationalization of Chocolate

Please visit www.ferrero.com and read business mission and Ferrero in the world section, then discuss Ferrero’s reasons to internationalise into almost all parts in the world? Why Ferrero has been successful in the internationalisation process of the company?

Born Global

The ‘Born Global’ concept was coined in a survey for The Australian Manufacturing Council by the McKinsey Consultants

In Australia, a new breed of exporting companies, which contributed substantially to the nation's export capital, was then emerging. The creation of these exporters though not unique to the Australian economy, reflects 2 fundamental phenomena of the 1990s:

1.Small is beautiful

2.Gradual internationalization is dead

Born Global

Amongst the Born Global firms, in Australia, there are several high-tech firms, but the typical firm uses well-known technology.

These firms have experienced higher growth rates than other industries in Australia and a large growth in their export compared to their home-market sales.

A major factor in the explanation of the Born Global phenomenon (McKinsey & Co., 1993) is the management’s commitment to internationalization.

Another major factor is the firm’s ability to standardize production, marketing, etc. in a global niche instead of developing customized products.

Factors Supporting ‘Born Global’

Dramatic increases in speed, quality and efficiency of international communication and transportation have reduced the transaction costs of multinational interchange.
Increasing homogenization of many markets in distant countries has made the conduct of international business easier to understand by everyone.
International financing opportunities are increasingly available.
Human capital is internationally mobile.

References

Ghoshal, S., & Nohria, N. (1993), “Horses for courses: Organizational forms for multicultural corporations”, Sloan Management Review, Winter 1993, pp. 27, 31.
Johanson, J., Vahlne, J.-E. (1977), "The internationalization process of the firm – a model of knowledge development and increasing foreign market commitments", Journal of International Business Studies, Vol. 8 No.1, pp.23-32.
Madsen, T.K., Servais, P. (1997), "The internationalization of born globals: an evolutionary process?", International Business Review, Vol. 6 No.6, pp.551-81.
Oviatt, B.M., McDougall, P.P. (1994), "Toward a theory of international new ventures", Journal of International Business Studies, Vol. 25 No.1, pp.45-64.
Oviatt, B.M., McDougall, P.P. (1995), "Global start-ups: entrepreneurs on a worldwide stage", Academy of Management Executive, Vol. 9 No.2, pp.30-44.

IB 5/For expert/IBtopic5 - entry mode 1.ppt

International Business: Actions
Entry mode (I)

Business College

School of Management

Aims of the Session:

To understand different forms of internationalisation and market entry.
To consider the benefits and problems of firm internationalisation from different perspectives.

Key Questions

How do organisations internationalise?

What are the advantages and disadvantages of various types of market entry?

Recap

We examined the key IB theories last week.
In this week, we will look at foreign market entry modes and the advantages and disadvantages associated with them.

Modes of Entry

Organisations contemplating foreign expansion must consider the following:

Which foreign market(s) to enter

Timing of entry

What form of entry to use

What scale of entry to establish

Which mode of entry to adopt

Entry Decision Making Under Uncertainty: Trade-off Between Flexibility and Commitment

Timing: When is a good time to enter?

Potential gain from waiting

Cost of delay

Scale of entry

Small scale: Establish a foothold to learn

Large scale: Acquire first mover advantage

Speed of expansion: How fast to grow?

Value of learning

Preemption of competitors

Constraints of internal resources

Mode

Some modes have more flexibility embedded

Some modes reduce resource requirements

Which Foreign Markets

The choice must be based on an assessment of a country’s degree of alignment with firm strategy and likely contribution to revenue and profit

The attractiveness of a country depends upon balancing the various associated benefits, costs, and risks

These relate to: customer identification, production capabilities, or financial opportunities

Benefits may relate to: market expansion, production flexibility, investment opportunity, etc.

Risks may be competitive, political, financial, etc.

Timing the Entry

‘First-mover advantages’ that may be derived from entering a market early:

Preempting rivals and capturing demand

Establishing a strong brand name

Building sales volume

Creating ‘switching costs’ for customers and clients

‘First-mover disadvantages’ may derive from:

Pioneering costs that early entrant incurs

Unanticipated political, legal, regulatory etc. risks

Additional costs of entry that may not be recouped before competition increases and profit margins decline

Scale of Entry

Large scale entry:

Involves ‘strategic commitment’ - a decision with long-term impact that is difficult to reverse

May lead rivals to rethink market entry

May prompt competitive response from existing players

Small scale entry:

Requires limited financial and other resource commitment

Provides time to learn about market

Reduces exposure to risk

Activity 1: International Market Choice

Considering concept of Timing/Scale/Speed, please return to the case of e-retail market in China and discuss potential success or failure of Walmart e-retail in China. Why China?

http://www.youtube.com/watch?v=VThkcxEqa7I

Choice of Market Entry Mode

Modes? Markets? Art? Science?

Complementarity of Resources

Local Firm’s Resources

Imitating capabilities
Older technology and know-how
Country-specific marketing expertise
Country specific organization skills

MNC’s Resources

Innovative capabilities
Advanced technology and know-how
Industry-specific marketing expertise
Organization structure and systems

Going it Alone: Export

Export of Goods

MNC

Revenues

Customers

HOME COUNTRY

HOST COUNTRY

Going it Alone: Export

Advantages

Low initial investment
Reach customers quickly
Complete control over production
Benefit of learning for future expansion

Disadvantages

Potential costs of trade barriers

Transportation cost

Tariffs and quotas

Foregoes potential location economies
Difficult to respond to customer needs well

When Is Export Appropriate?

Low trade barriers
Home location has cost advantage
Customization not crucial

Licensing Agreement

Local Firm

HOME COUNTRY

HOST COUNTRY

MNC

Licensing of Technology

Fees and Royalties

Licensing Agreement

Advantages

Low initial investment
Avoids trade barriers
Potential for utilizing location economies
Access to local knowledge
Easier to respond to customer needs

Disadvantages

Lack of control over operations
Difficulty in transferring tacit knowledge

Negotiation of a transfer price

Monitoring transfer outcome

Potential for creating a competitor

When Is Licensing Appropriate?

Well codified knowledge
Strong property rights regime
Location advantage

Activity 2: Licensing Case Discussion

You and your team are the assistant to the CEO of a small textile firm that manufactures quality, premium-priced, stylish clothing (Italian Brand). The Italian CEO has decided to see what the opportunities are for exporting or licensing and has asked you and your team for advice as to the steps the company should take. What advice would you give the CEO?

Foreign Acquisition

Local Firm

HOME COUNTRY

HOST COUNTRY

MNE

Investment

Profit

Foreign Acquisition

Advantages

Access to target’s local knowledge
Control over foreign operations
Control over own technology

Disadvantages

Uncertainty about target’s value
Difficulty in “absorbing” acquired assets
Infeasible if local market for corporate control is underdeveloped

When Is Acquisition Appropriate?

Developed market for corporate control
Acquirer has high “absorptive” capacity
High synergy

Compensation Trade

HOME COUNTRY

HOST COUNTRY

MNE

Local Firm

Common reason: Local firm’s lack money to buy equipment
Economic benefits

Enhanced incentives for MNE to make sure that equipment works

MNE’s skills in marketing the products in its home country

Equipment and technology

Output

Activity 3: Merger and Acquisition

Please watch this clip on international merger and acquisition http://www.youtube.com/watch?v=EKArEQ_8xFM

Then, list factors affecting the success of international merger and acquisitions.

IB 5/For expert/IBtopic6(3).ppt

International Business: Actions
Entry modes (II)

Business College

School of Management

Key Learning Objective

This session will help you to understand the concepts of:

1) Internationalisation of business organisations

2) Key international business theories

3) Complexities of choices and approaches in internationalisation

Aims of the Session:

To understand different forms of internationalisation and market entry.
To consider the benefits and problems of firm internationalisation from different perspectives.

Key Questions

How do organisations internationalise?

How does international business manage its internal operations?

How does international business manage its external operations (e.g. relationship with the host country/communities)?

Recap

We looked at the concept of ‘internationalisation’ of firms and rationale behind their decision-making process.

Advantages and Risks of internationalisation

Modes of Entry

Organisations contemplating foreign expansion must consider the following:

Which foreign market(s) to enter

Timing of entry

What form of entry to use

What scale of entry to establish

Which mode of entry to adopt

Going it Alone: “Green Field” Entry

New Subsidiary Company

HOME COUNTRY

HOST COUNTRY

MNE

Investment

Profit

Going it Alone: “Green Field” Entry

Advantages

Normally feasible
Avoids risk of overpayment
Avoids problem of integration
Still retains full control

Disadvantages

Slower startup
Requires knowledge of foreign management
High risk and high commitment

When Is “Green Field” Entry Appropriate?

Lack of proper acquisition target
In-house local expertise
Embedded competitive advantage

Between 2007 and 2011, a total of 1,243 foreign direct investment (FDI) projects were recorded in Australia from 933 companies. This represents an average annual growth rate of 15.4 per cent with a total capital investment of US$122 billion. Greenfield investments accounted for 84.8 per cent of projects over this five year period.
(Brisbanemarketing, 2012)

Activity 1: Hyundai goes greenfield in Czech Republic

In 2008, Hyundai invested in the form of greenfield investment in Czech republic (http://www.eurofound.europa.eu/eiro/2006/04/articles/cz0604029i.htm). Please discuss the choice of doing greenfield investment. Why this strategy? What are the benefits and pitfalls for Hyundai?

Management Contract

Local Firm

HOME COUNTRY

HOST COUNTRY

MNE

Wholly-Owned Subsidiary

Managerial Service

Management Fees

Technological Inputs

Profit

Contractual entry modes

Management contracts

One company supplies another with managerial expertise for a specific period of time

+ Low risk

+ Receive awards from governments

+ Governments use to develop the skills of local workers

- Managers’ lives in danger when countries are undergoing political or social turmoil

- Can create future competitors

Licensing

Franchising

Management contracts

Turnkey projects

Management Contract

Advantages

Access to local management skills
Avoids buying unwanted assets
Retains strategic control

Disadvantages

Potential incentive problem
Potential adverse selection problem

How do you know the competencies of the manager?

When Is a Management Contract Appropriate?

Manager has a reputation to protect
Hotels
Consulting companies
Performance-based contract provides no perverse incentives

Turnkey projects

One company designs, constructs, and tests a production facility for a client firm

+ Permit firms to specialize in their core competencies

+ Allow governments to obtain designs for infrastructure projects from the world’s leading companies

- Company may be awarded project for political reasons

Can create future competitors

No long term interests.

Licensing

Franchising

Management contracts

Turnkey projects

Contractual entry modes

Joint Venture

Joint Venture Company

MNE

Local Firm

HOME COUNTRY

HOST COUNTRY

Inputs

Share of Profit

Inputs

Share of Profit

Joint Venture

Advantages

Access to partner’s local knowledge
Reduction of concern about overpayment
Both parties have some performance incentives
Significant control over operation

Disadvantages

Potential loss of proprietary knowledge
Potential conflicts between partners
Neither partner has full performance incentive
Neither partner has full control

When Is a Joint Venture Appropriate?

Both partners contribute hard-to-measure inputs
Large expected mutual gains in the long-run
Trade secrets can be walled off

Air Asia – Tata Joint Venture

This is the story of IJV between TATA and Air Asia in India:

Case Study

RMIT University

School of Management

Activity 3: International Joint Venture Case Study

Please read this IJV case study and answer the following questions:

http://cws.cengage.co.uk/doole5/students/case_studies/chap_07.pdf

What are the factors that MNCs should consider when deciding to use an international joint venture as a market entry strategy?

What are the potential benefits and risks in taking this course of action?

RMIT University

School of Management

Common Market Entry Modes

Joint Venture Company

Licensing

Acquisition

Joint Venturing

Local Firm

New Subsidiary Company

“Green Field” Entry

HOME COUNTRY

HOST COUNTRY

Export

MNE

Int’l Sourcing

HOME COUNTRY

HOST COUNTRY

MNE

Local Firm

Applicable to manufacturing of mature products (e.g., shoes)
Access to location economies
Competition among OEM producers lowers costs.

Design, spec and/or technology

OEM goods

Payment

Activity 3: Is Nigeria an attractive place for FDI?

Please watch this and discuss the question.

http://www.youtube.com/watch?v=I77sUqQx8i4

Modes of entry
Exporting	Contractual Agreement	Joint Venture	Acquisition	Greenfield Investment
Risk	Low	Low	Moderate	High	High
Return	Low	Low	Moderate	High	High
Control	Moderate	Low	Moderate	High	High
Integration	Negligible	Negligible	Low	Moderate	High

Future Reading

Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign Entry: A Transaction Cost Analysis. Journal of International Business Studies, 17: 1-26.

Kogut, B. and H. Singh. 1988. The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19: 411-432.

- Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: The strategy of Japanese investors in the United States. Management Science, 39(9): 1054-1070.

- Hennart, J. F., and Reddy, S. 1997. The Choice Between Mergers/Acquisitions and Joint Ventures: The Case of Japanese Investors in the United States. Strategic Management Journal 18: 1-12.

- Barkema, H. G. and Vermeulen, F. 1998. International Expansion Through Start-up or Acquisition: A Learning Perspective. Academy of Management Journal 41: 7-26.

- Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or Greenfield Start-up? Institutional, Cultural and Transaction Cost Influences. Strategic Management Journal 21: 89-97.

IB 5/Marking Criteria and feedback Proforma for assignment - BUSM1227 International Business - S2 2014.doc

RMIT SCHOOL OF MANAGEMENT

International Business (BUSM1227)

ASSIGNMENT MARKING FEEDBACK PROFORMA (2014 S2 SIM)

Student Name_____________________________ Student No.________________

	Excellently developed	Well developed	Averagely Developed	Partially developed	Minimally/Not developed
1. Strategic analysis of entry mode – question 1(quality, depth and relevance of analysis) (17 marks)
2. Environmental analysis of entry mode – question 1 (quality, depth and relevance of analysis) (17 marks)
3. Recommendations – question 2 (10 marks)
4. Introduction and Conclusion (coverage, quality and relevance of the introduction and conclusion) (6 marks)

Note: Marks for the following marking criteria are included in the first three criteria due to their inclusive nature. They are provided separately here to give you more detailed feedback in terms of your academic writing.

4. Format and written style (title, introduction, conclusion, academic writing skills)

Excellent Good Fair Poor

5. Presentation (grammar and spelling, layout, spacing, margin, page numbering, word count etc)

Excellent Good Fair Poor

6. References (sufficiency, quality, style and relevance)

Excellent Good Fair Poor

MARK: /50

GRADE HD DI CR PA F

COMMENTS