Chapter 01 - The Challenging World of International Business

Chapter 1

The Challenging World of International Business

Learning Objectives

LO1-1Understand what international business is and why it is important.

LO1-2Comprehend why and how international business differs from domestic business.

LO1-3Appreciate that international business has a long and important history in the world’s development.

LO1-4Appreciate the dramatic internationalization of markets.

LO1-5Understand the five kinds of drivers, all based on change, that are leading firms to internationalize their operations.

LO1-6Recognize the key arguments for and against the globalization of business.

LO1-7Explain the reasons for entering foreign markets.

LO1-8Recognize that globalization of an international firm occurs over at least seven dimensions and that a company can be partially global in some dimensions and completely global in others.

NOTE:

International business statistics, data, and facts about countries, regions, governments, and companies can change rapidly and dramatically. We recommend that you update this information regularly.

As an adopter of this text, McGraw-Hill offers you a complementary online resource each month, the International Business Newsletter. The IB Newsletter gives you an array of timely and relevant articles, videos, country profiles, teaching suggestions, and data resources to add breadth, depth, and richness to the ever-changing topic of international business.

iGlobe is also a way to keep your courses current. In partnership with PBS, iGlobe is a free video service for McGraw-Hill adopters that allows you to download breaking news videos onto your desktop to show in class or online. Updated monthly, these streaming videos are complete with teaching notes and discussion questions. Key concepts for each video are identified to save you time! Visit or talk to your McGraw-Hill sales representative for more information about iGlobe or the IB Newsletter.

Overview

Global competition continues to increase at a rapid pace. The huge increase in imports due to the reduction in trade barriers, coupled with increased foreign investment, means that all firms face competitors from any place in the world. This increasing internationalization of business requires managers to have a global business perspective gained through experience and education.

International business differs from domestic business in that it involves three environments–domestic, foreign, and international–instead of one. Although the kinds of forces are the same in the domestic and foreign environments, their values often differ, and changes in the values of the foreign forces can be at times more difficult to assess

International businesspeople must know enough about the differences in the environmental forces of the markets in which they operate to be able to decide if a concept or a technique (1) can be transferred to another country as is, (2) must be adapted to local conditions, or (3) cannot be used elsewhere.

Suggestions and Comments

Students find the definitions in this chapter helpful. Stress that building, understanding, and correctly using the terms associated with international business helps them move toward understanding and being able to articulate IB's complexity. This will assist them in comprehending and being able to perform effectively within a world that is increasingly international in its context and forces.

Students tend to be aware marginally of their consumer-level dependence on international business. To arouse their early interest in the importance of this course, we use one or more of the student involvement exercises listed in the following section.

Student Involvement Exercises

1. One professor starts the course by asking students this question: “If I snapped my finger (snap your finger) and every piece of clothing we are wearing today that was NOT manufactured in the U.S. disappeared, how we would be dressed?” The obvious answer is “naked.” Then move into a discussion of our dependence on foreign manufactured goods as a segue into your orientation for this course.

2. Hold up a common object such as a lead pencil. Where do the materials come from? Rubber comes from the Far East, the copper and tin from which the brass ferrule is made may come from Chile and Malaysia respectively, etc.

3. Ask if anyone in class is influenced by international business. The response is often negative, except for foreign students. This can open up a discussion to show our dependence on imports (Smart Phones, iPads, laptop computers, Blu-ray, Flat Screen HDTVs, cars, etc.), outsourcing, and foreign direct investment. For example, foreign ownership of grocery chains in the U.S. has grown significantly in the last five years (Trader Joe’s, Stop&Shop, Aldi, Food Lion, Hannaford).

4. Research other American brands and businesses that are owned by foreign companies. They might be surprised who really owns what in the U.S. and how brand identification and ownership may be different. The chapter’s Worldview, “Are You Really Buying American?,” and Mini-case 1.1 at the end of the chapter, “Ownership of Companies and Brands,” provide opportunities to explore these issues in more depth.

Course Project

You can start the class off on an international business project here or wait until the class has started so students have an understanding of IB. Here is a summary of a possible project:

International Business Project

Objective: To create a foreign market entry business plan for taking an American consumer product into a foreign country.

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Project Outline

1. Size of market (demographics, socioeconomic state, urban/rural).

2. Sociocultural acceptance of product – is adaptation necessary?

3. Legal/bureaucratic environment (imports, local manufacture, taxation).

4. Competition in market.

5. Economic and political climate for foreign business.

6. Methods for marketing and distribution.

7. Managerial and labor climate.

8. Financial viability (profit margin, currency translation, profit repatriation).

Project Report

The report will essentially cover all topics in the outline plus an executive summary, introduction (country and product), and recommendations. The report will be word-processed, about 20 pages (double-spaced) and will have an appendix that contains exhibits and a complete bibliography of sources. Examples are maps of the country, tables, and charts.

Project Presentation

The project will be presented to the class in the week prior to the exam week. Thirty minutes will be allotted to each team. Each member will participate in the presentation. Develop appropriate visual supports.

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Guest Lecturers

Any of the following business people could describe the challenges presented by the rapidly changing aspects of international business by discussing the pace of change in their own industry:

1. Personnel managers who staff the overseas subsidiaries and international divisions for a local firm to talk about job possibilities.

2. Retired executives who have worked as expatriates.

3. Bankers from the international division of a local bank. Often, they share leads to firms in your area that are engaged in international business.

4. Executives from a local international or multinational firm.

You might also be able to contact a foreign exchange student in advance and ask him/her to discuss the nature of his/her home country and some of the differences that he/she has observed here.

Worldview

The focus of this Worldview explores “Are You Really Busying American?” From bumper stickers to tee shirts, the slogan “Buy American” has become a common refrain from some American consumers. What does it mean to buy American? Is the Honda Accord made in Marysville, Ohio less American than the Nike Air athletic shoe made in China? What about that Dodge Ram truck? Nothing is more American than a pick-up truck, but Dodge is now controlled by Italy’s Fiat. The globalization of markets has created cross-border investments linking the workers and consumers of the world to one another in a way that was unimaginable 50 years ago. This Worldview examines the nationality of the companies that own a variety of common American brands. This serves as a starting point for a stimulating class discussion, which might be expanded through discussion questions such as: “Is there such a thing as an ‘American made product’?” and “As a consumer, are you more patriotic when you purchase an American made product?”

Global Debate

The focus of this Global Debateexplores “The Globalization Debate and You” and hints at a range of issues regarding the pros and cons of globalization. This serves as a starting point for a stimulating class discussion on globalization. Ask students to discuss how they view globalization and the reasons for their views. Potential discussion questions can include: “Discuss the benefits of globalization and the concerns regarding the globalization of markets as outlined in the textbook? Are you concerned with the internationalization of markets? If so why?, “ or “If international business is not a new topic, what about the globalization is it new? What are the roots of globalization? Is globalization accelerating? Why or why not?,” or “How have you benefited personally or been negatively impacted by the forces of globalization? Please be specific in your response.” A summary of the class discussion would offer an appreciation of the many issues related to globalization and the many views on this complex issue in which we are all involved.

The Global Path Ahead

The focus of this The Global Path Aheadexplores a student’s initial extended international experience, in which he taught English in Dalian, China, for 5 months, as part of an AIESEC internship. It can be valuable to discuss the experiences he had, and ask the class what they might expect from a similar experience: what would be different and how, what would be very similar, what might be the most difficult, etc. It is worth considering a question such as, “Ryan suggests that the most important thing, when going abroad, is to keep an open mind. Do you agree with this recommendation? How easy is this to accomplish? What might you need to do, or not do, in order to ‘keep an open mind’ in a different culture?”

At least some of your students are likely to be interested in exploring international job opportunities, but we find that many of them feel that such opportunities are limited or are hard to find. In that respect, the “Resources for Your Global Career” section at the end of The Global Path Ahead has a broad range of valuable insights and linkages to assist students in finding opportunities to work abroad and in preparing themselves to perform well if and when they are able to exploit such opportunities. It may even be a useful expenditure of class time to visit one or two of the websites listed, such as the Riley Guideor the Expertise in Labour Mobility sites, to illustrate some of the resources that are readily available to the students. Remind students that each chapter will contain a vignette in The Global Path Ahead box, as well as a variety of “Resources for Your Global Career” suggestions.

Mini-Case 1.1, “Ownership of Companies and Brands”

This mini-case provides an opportunity for students to test their knowledge about who the owners are of some common brand names, and which country(ies) the owners are based in. Putting these on PowerPoint slides, projecting them, asking students to give their answers, and then presenting the actual answers can be a good basis for discussing the internationalization of business in our everyday lives. The answers are:

  1. 7-Eleven Stores is owned by Seven and I Holdings Co. of Japan.
  2. Chesebrough-Pond (Vaseline) is owned by Unilever of the Netherlands.
  3. Meybelline costmetics is owned by L’Oreal of France.
  4. Diesel clothing is produced by Diesel S.p.A. of Italy.
  5. Aquafresh toothpaste is owned by GlaxoSmithKline plc of the United Kingdom.
  6. Baby Ruth candy bars are produced by Nestle of Switzerland.
  7. Holiday Inn motels are owned by InterContinental Hotels Group plc of the United Kingdom.
  8. Arrowhead water is owned by Nestle of Switzerland.
  9. Columbia Pictures motion picture studios are owned by Sony of Japan.
  10. Arco gasoline is owned by BP of the United Kingdom.
  11. Nerds candy is owned by Nestle of Switzerland.
  12. Popsicle frozen treats are owned by Unilever, a British-Dutch multinational.
  13. Random House is owned by Bertelsmann of Germany.
  14. Ralston Purina pet foods are owned by Nestle of Switzerland.
  15. Motel 6 is owned by Accor of France.
  16. Pinkertons is owned by SecuritasAB of Sweden.
  17. Ban deodorant is owned by Kao Corporation of Japan.
  18. RCA Records is owned by Sony of Japan.
  19. Thinkpad laptop computers are owned by Lenovo of China.
  20. Norelco electric shavers are owned by Philips of the Netherlands.

Lecture Outline

Opening Section
The chapter begins with the assertion that all managers need to have a basic knowledge of international business to be able to meet the challenge of global competition. This is a good time to encourage students to begin to consider themselves as a potential international businessperson. Refer students toThe Global Path Ahead on pages 24-27to explore international job opportunities.

  1. What is International Business?
  1. Definitions of terms used in this text
  1. An international business is a business whose activities are carried out across national borders.
  2. A foreign business is the operations of a company outside its home or domestic market.
  3. A multidomestic company (MDC) is an organization with multi-country affiliates, each of which formulates its own business strategy based on perceived market differences.
  4. A global company (GC) is an organization that attempts to standardize and integrate operations worldwide in all functional areas.
  5. An international company (IC) is a global or multidomestic company.
  1. Additional terminology for international businesses used by UN, academic writers
  1. Transnational company – a company that combines the characteristics of global and multinational firms; responsive to different global environments.
  2. Multicultural multinational is a newer namefor a transnational company.
  1. What is Different About International Business?

An international firm operates across borders and deals with 3 environments – domestic, foreign, and international.

  1. Influence of External and Internal Environmental Forces

Forces in the Environments:

  1. External Forces (uncontrollable)
  1. Competitiveg. Physical
  2. Distributiveh. Political
  3. Economici. Sociocultural
  4. Socioeconomicj. Labor
  5. Financialk. Technological
  6. Legal
  1. Internal Forces (controllable): such as:
  2. Factors of production – capital, raw materials, and people
  3. Activities of the organization – personnel, finance, production, and marketing
  1. The Domestic Environment

All the uncontrollable home country factors that surround and influence the firm.

  1. The Foreign Environment
  1. All uncontrollable forces originate outside of home country and surround and influence the firm.
  2. Forces Have Different Values
  3. Forces Can Be Difficult to Assess
  4. The Forces Are Interrelated
  1. The International Environment
  1. Interactions between:
  2. Domestic and foreign environmental forces
  3. Between the environmental forces of 2 countries when an affiliate in 1 country has customers in another
  4. International organizations affect the international environment and include:
  5. Worldwide bodies – World Bank
  6. Regional economic groups of nations – NAFTA, EU
  7. Organizations bound by industry agreements – OPEC
  8. Decision Making is More Complex
  1. Multiple forces make decision making more complex.
  2. Not only are there many sets of forces, but the differences among them sometimes are extreme.
  1. Self-Reference Criterion
  1. Managers are frequently unfamiliar with other cultures. Moreover, many have the tendency to refer unconsciously to their own cultural values. Self-reference criterion, as this is called, is probably the biggest cause of international business blunders.
  1. A Brief History of International Business
  1. International trade and the international firm are not new aspects of business.
  1. Phoenician and Greek merchants were selling abroad before the time of Christ
  2. China, world’s leading manufacturer for 1,800 years until about 1840, established integrated trading systems
  3. Trade impacted politics, the arts, agriculture, industry, and public health throughout recorded history
  4. The Ottoman Empire profoundling influenced international trade
  5. Control ultimately spanned Europe, North Africa, and the Middle East.
  6. Influenced emerging trading roots for people, goods, money, animals, and microorganisms, from England to China, across the Mediterranean and Northern Africa, and through Central Asia and the Indian Ocean region.
  7. By raising cost of Asian trade for Europeans, they spawned a search for sea routes to Asia.
  1. British East India Company (1600) established foreign branches.
  2. “Age of Mercantilism” in the 17th and 18th centuries.
  3. Number of multinational companies existed in late 1800s.
  4. By 1914, at least 37 American companies had production facilities in two or more overseas locations. At that time, American foreign direct investment was $2.53 billion, which amounted to 7% of nation’s GNP.
  5. Level of intracompany trade of multinationals in 1930, as a percentage of overall world trade, may have exceeded the proportion at the end of the 20th century.
  6. International firms have become the objects of much discussion, especially the increasing globalization of their production and their markets. What are the reasons for globalization?
  1. Growth of International Firms and International Business

There has been explosive growth in the size and number of U. S. and foreign international concerns. One variable used to measure this growth is the increase in total foreign direct investment (FDI).

A. Expanding Number of International Companies

1.According to UNCTAD, there are 82,000 transnational companies with international production, having 810,000 foreign affiliates employing 78 million people. These transnationals account for 25% of global output and two-thirds of world trade. Foreign affiliates’ sales have grown 700% in the past 20 years.

2.Since the 1980s, there has been a marked liberalization of government policies and attitudes toward foreign investment in both developed and developing nations.

3.Critics of large global firms cite such statistics as the following to “prove” that host governments are powerless before them: In 2010, only 23 nations had GNIs greater than the total annual sales of Wal-Mart Stores (world’s largest IC by sales volume).

B. Foreign Direct Investment and Exporting are Growing Rapidly (Fig. 1.1)

1.The world stock of outward FDI is estimated to have risen to $19.0trillionby the beginning of 2010— 9 times larger than in 1990.