Part One

Background for International Business

 

Chapter 1

International Business: An Overview

 

 

Objectives

 

!                   Define international business and describe how it differs from domestic business.

!                   Explain why companies engage in international business and why its growth has accelerated.

!                   Introduce different modes a company can use to accomplish its global objectives.

!                   Illustrate the role social science disciplines play in understanding the environment of international business.

!                   Provide an overview of the primary patterns for companies’ international expansion.

!                   Describe the major countervailing forces that affect international business.

 

 

Chapter Overview

 

More and more foreign countries are becoming a source of both production and sales for many firms. Chapter 1 examines the reasons for this, as well as the various modes used by firms to engage in international business. The chapter describes the evolution of firm strategy as part of the internationalization process, plus the countervailing forces that firms are likely to encounter during that process. In addition, the elements of the external international business environment are briefly introduced, prior to their being considered in detail in the following three chapters.

 

 

Chapter Outline

 

OPENING CASE: Star Wars: Episode II —Attack of the Clones


This case sets forth the global mindset of Lucasfilm with respect to the production and distribution of Star Wars: Episode IIAttack of the Clones. It describes the advantages gained by using multi-country production locations and an international cast and crew. In addition, it explains the reasons behind the simultaneous release of the film in nine countries on the first day, plus another large group of countries the following day. The case also describes the strategic adjustments that Lucasfilm made to accommodate national technical and cultural differences, as well as the additional revenue sources associated with the sales of rights to produce and sell products associated with characters and scenes from the movie.

 

Teaching Tip: Carefully review the PowerPoint slides for Chapter 1. For additional visual summaries of key chapter points, also review text Figures:

·         1.2—International Business: Operations and Influences

·         1.4—Means of Carrying Out International Operations

·         1.5—Physical and Societal Influences on International Business

·         1.6—The Competitive Environment and International Business

·         1.7—The Usual Pattern of Internationalization.

Finally, note the atlas that follows the chapter (pages 30-41).

 

I.          INTRODUCTION TO THE FIELD OF INTERNATIONAL BUSINESS

International business involves all commercial transactions—private and governmental (public)—between two or more countries. Global events and competition affect almost all firms, large or small. However, the international environment is more complex and diverse than a firm’s domestic environment.

A.        Why Companies Engage in International Business

1.         Expand Sales. Companies may increase the potential market for their sales by pursuing international consumer and industrial markets.

2.         Acquire Resources. Foreign-sourced goods, services, components, capital, technology and information can make a firm more competitive both at home and abroad.

3.         Minimize Risk. Firms may pursue foreign markets in order to minimize cyclical effects on sales and profits; they may also wish to counter the potential advantages that competitors might gain by participating in foreign market opportunities.

B.        Reasons for Recent International Growth—From Carrier Pigeons to the Internet

1.         Expansion of Technology. Vast improvements in transportation and communication technology have significantly increased the efficiency of international business operations.

2.         Liberalization of Cross-Border Movements. The reduction of trade barriers via the General Agreement of Tariffs and Trade and other such mechanisms has provided increased access to many foreign markets.

3.         Development of Supporting Services. Services provided by governments, banks and other businesses greatly facilitate the conduct and reduce the risks of doing business internationally.

4.         Consumer Pressures. Because of innovations in transportation and communications technology, consumers are better informed and thus demand higher-quality, more cost-competitive products.

5.         Increase in Global Competition. Companies may choose to operate internationally in order to gain access to foreign opportunities and improve their overall operational flexibility and competitiveness.

 


II.        MODES OF INTERNATIONAL BUSINESS

A firm can engage in international business through various operating modes, including exporting and importing merchandise and services (see Chapters 5 and 6 regarding international trade), licensing and management contracts (see Chapter 14 regarding collaborative arrangements), foreign direct and portfolio investments (see Chapters 8 and 11 regarding foreign direct investment) and strategic alliances with other companies (see Chapter 14 regarding collaborative arrangements).

A.        Merchandise Exports and Imports

Merchandise exports consist of tangible (visible) products, i.e., goods, which are sent to a foreign country for use or resale. Merchandise imports consist of tangible (visible) products, i.e., goods, brought into a country for use or resale.

B.        Service Exports and Imports

Service exports and imports represent intangible (invisible), i.e., non-merchandise, products. The firm or individual “exporting” a service will receive international earnings; the firm or individual “importing” a service will make an international payment.

1.         Tourism and Transportation. When an American flies to Germany on Lufthansa (a German airline) and stays in a German-owned hotel, payments made to Lufthansa and the hotel represent service export earnings for Germany and service import payments for the United States.

2.         Performance of Services. Some services, such as turnkey operations (construction of facilities, performed under contract, that are transferred to the owner when they are ready for operation) and management contracts (arrangements in which one firm provides personnel to perform management functions for another), yield export earnings to service providers in the form of fees paid by foreign clients.

3.         Use of Assets. Firms may receive export earnings, i.e., royalties, by allowing foreign clients to use their assets (trademarks, patents, copyrights and other expertise). Licensing represents a transaction in which a licensor (exporter) sells the rights to the use of its intellectual property to a licensee (importer) in exchange for a fee. Franchising is a special form of licensing in which the licensor is granted more control over the licensee in exchange for the provision of additional support and services.

            C.        Investments

Foreign investment consists of the direct and portfolio ownership of assets in a foreign country.

1.         Direct Investment. Foreign direct investment (FDI) occurs when an investor gains a controlling interest in a foreign operation. Sole ownership represents 100% ownership of an operation; however, effective control can be realized with just a minority stake if the remaining ownership is widely dispersed. A joint venture represents a direct investment in which two or more partners share ownership. A mixed venture represents a commercial operation in which ownership is shared by a government and a business.


2.         Portfolio Investment. Portfolio investment is a non-controlling interest in a venture made in the form of either debt or equity.

            D.        International Companies and Terms Used to Describe Them

1.         There are numerous forms of collaborative arrangements through which companies work together internationally, such as licensing, management contracts, or long-term contractual arrangements. A strategic alliance is more narrowly defined to indicate that the agreement is of critical importance to the competitive viability of one or more partners.

2.         A multinational enterprise (MNE) is a firm that takes a global approach to foreign markets and production, i.e., it takes a corporate perspective in its worldwide selection of markets and production sites. The terms multinational corporation (MNC) and transnational company (TNC) may also be used in this context.

3.         A global company (also known as a globally integrated company) integrates its operations on a worldwide basis. A multidomestic company (also known as a locally responsive company) tailors its strategies to national and/or regional preferences by granting decision-making authority to local managers.

 

III.       EXTERNAL INFLUENCES ON INTERNATIONAL BUSINESS

            A.        Understanding a Company’s Physical and Societal Environments

To effectively operate in the external environment, a firm’s managers must understand not only business operations, but they also must have a working knowledge of the basic social sciences, such as law, political science, anthropology, sociology, psychology, economics and geography.

            B.        The Competitive Environment

The competitive environment varies by industry and country. Likewise, a company’s competitive situation may differ in terms of its relative strength and in terms of which competitors it faces from one country to another. Thus, a firm’s competitive strategy directly influences how and where it can best operate.

 

IV.       EVOLUTION OF STRATEGY IN THE INTERNATIONALIZATION PROCESS

Typically, a firm’s commitment to international operations evolves as part of its overall growth and operating strategies over time. Nonetheless, more start-up companies are becoming international very early in their lives because of advancements in communications and managerial knowledge about foreign locations.

A.        Patterns of Expansion

1.         Passive to Active Expansion. Most companies think only of domestic opportunities until a foreign opportunity presents itself.

2.         External to Internal Handling of Operations. After initially relying on intermediaries, a firm will learn enough about foreign operations to consider them less risky than at the onset. It then may choose to handle at least some of those operations internally.


3.         Deepening Mode of Commitment. Usually firms begin their international operations via importing or exporting. Once they have successfully built export markets, however, they often move into some type of foreign production to meet foreign demand.

4.         Geographic Diversification. Initially companies tend to expand to those foreign locations that are geographically close and culturally similar. Later they move to more distant countries perceived to have less similar environments to their home countries in order to expand on the one hand, but minimize risk on the other.

            B.        Leapfrogging of Expansion

Many start-up firms are now beginning with a global focus because of the international education and experience of their founders. Technological advances in the Internet and other forms of communication give these companies access to both worldwide markets and resources.

 

V.        COUNTERVAILING FORCES

Countervailing forces influence the conditions in which companies operate and their options for operating internationally. Rivalries among countries, cross-national treaties and agreements and ethical dilemmas can inhibit a firm’s quest for maximum global profits.

A.        Globally Standardized versus Nationally Responsive Practices

Trends that influence the worldwide growth in international business often favor the use of a global strategy, i.e., standardization, thus capturing gains from economies of scale. On the other hand, a firm may choose to use a multidomestic strategy, i.e., to be nationally responsive, thus increasing its effectiveness by adjusting to the different conditions it encounters in the various countries in which it operates.

            B.        Country versus Company Competitiveness

At one time the performance of a country and that of its domestic companies were considered to be mutually dependent and beneficial. However, many companies now choose to compete by seeking maximum production efficiency on a global scale, even if it means moving production activities abroad. If as a result high-value activities increase sufficiently in the home country, it will realize an economic gain; if not, the country’s economic position will deteriorate. Countries continue to entice both domestic and foreign firms to locate activities within their borders through regulations, on the one hand, and incentives on the other.

C.                Sovereign versus Cross-National Relationships

Although governments act in their own self-interest, they may choose to cooperate with one another and even cede limited sovereignty through treaties and other agreements.

1.         Countries enter into a variety of bilateral and multilateral treaties and agreements with other countries regarding commercial activities in order to gain reciprocal advantages for themselves and their domestic firms.

2.         Countries enact treaties and agreements to coordinate activities along their shared borders and deal with problems that a single country acting alone cannot solve.

3.         Countries enact treaties and agreements to deal with areas of concern that lie outside the territory of all countries, i.e., the non-coastal areas of the oceans, outer space and Antarctica.

 

ETHICAL DILEMMAS AND SOCIAL RESPONSIBILITY:

Sorting through the World of Right and Wrong in International Business

Firms take many actions that elicit almost universal agreement about what is right or wrong. In the international arena, however, religious beliefs, social attitudes, laws, regulations and policies may vary significantly. No set of workable corporate guidelines is universally accepted and observed. An MNE may find it has either more or less latitude in making decisions in the foreign countries in which it operates. Cultural relativism holds that ethical truths depend upon the groups holding them; thus intervention in local traditions is seen as unethical. On the other hand, normativism holds that there are universal standards of behavior everyone should follow, thus making non-intervention unethical. From a business standpoint, two possible objectives are to (a) proactively create competitive advantages though socially responsible behavior that leads to trust and commitment and (b) avoid being perceived as irresponsible.

 

LOOKING TO THE FUTURE:

Seizing That Window of International Business Opportunity

At this time there is much confusion about the future growth of international business. Nonetheless, a firm that wants to capitalize on international opportunities must not wait too long. By envisioning different ways in which the future may evolve, a company can be better prepared to develop the facilities and people needed to succeed in an uncertain environment.

 

WEB CONNECTION

 

Teaching Tip: Visit www.prenhall.com/daniels for additional information and links relating to the topics presented in Chapter 1. Refer your students to the on-line study guide, as well as the Internet exercise for Chapter 1.

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CLOSING CASE: Disney Theme Parks [See Map 1.1]

 

1.                  What do you think motivated Disney to set up parks abroad, and what might be the pros and cons from the standpoint of the Walt Disney Company?

Surely Disney was motivated to expand internationally in order to increase sales and profits. Initially, Tokyo Disneyland was established in response to a proposal from Japan’s Oriental Land Company, i.e., Disney was pulled into the international arena. The pros associated with Disney’s international expansion include a larger market for all Disney-related products: theme park visitors, Disney merchandise and licensing royalties. In addition, much of the expansion has been done in collaboration with joint venture partners, thus reducing the risk to Disney. The cons reflect the costs and risks associated with foreign direct investment activities, including cultural differences such as those encountered in France as well as trade and investment barriers.

 

2.         Why do you suppose Disney made no financial investment in Japan, one of $140 million in France and then one of over $300 million in Hong Kong?

The Oriental Land Company initially proposed the Tokyo park to Disney; because Disney did not want to provide any financing, the land company owns the park and pays Disney royalties from the operation. Given the success of that operation, Disney actively sought to enter the European market, although it collaborated with numerous partners in the development of that operation. In Hong Kong, Disney sees a gateway to China, as well as the fact that Hong Kong is Asia’s largest tourist destination. The Hong Kong government holds a 57 percent interest in the joint venture, while Disney owns 43 percent.

 

3.         What factors in the external environment have contributed to Disney’s success, failure and adjustment in foreign theme park operations?

Market demand for theme park entertainment, as evidenced first by foreign visitors to Disney’s US parks and then by visitors to its foreign operations, is substantial. Nonetheless, both the level of demand and Disney’s ultimate profitability are sensitive to upturns and downturns in the economic environment. Likewise, cultural differences have proven both beneficial (in Japan) and problematic (in France), and winter weather proved troublesome in France. Disney has adjusted to these factors by limiting its financial exposure via licensing and joint venture operations, adjusting prices in response to local conditions, adding features that are particularly desirable to host country visitors and adjusting its policies to be culturally compatible with host country traditions. In addition, Disney’s collaboration with the governments of France and Hong Kong has been crucial to the successful development of those respective operations.

 

4.         Should Disney set up a park in Shanghai? If so, what types of operating adjustment might it make there?

This is an excellent question for a class debate. Shanghai would provide additional access to the Chinese market; however, the possibility that Shanghai would siphon off potential visitors to the Hong Kong park is very real. If, as Disney says, the two parks would attract different types of visitors, Disney would likely have to adjust part of its product offering and perhaps its pricing policies as well in order to maximize its earnings at each park.

 

 


Additional Exercises: The Internationalization Process

 

Exercise 1.1. Ask students to name companies, both domestic and foreign, that operate internationally. Take time to explore the extent and nature of those firms’ operations. Also discuss a logical pattern of expansion for each type of operation. Conclude the discussion by examining the list and asking if there are any particular types of firms that seem to lend themselves to global operations and strategies more easily than others. Have the students explain why this might be so.

 

Exercise 1.2. Explore the impact of standardization, containerization and computerization upon the foreign trade process. Then ask students to discuss the role technology has played in other areas of the foreign trade, licensing and foreign direct investment processes.

 

Exercise 1.3. Ask students to develop a list of products (both goods and services) with global potential, i.e., those that require little or no adjustment in foreign markets. If adjustments are required, what would they be? Conclude the discussion by having the students develop a second list of products that would either require substantial adjustments or would have little if any potential in a global setting. Explore the reasons for this.