Rapid Change of International Business Essay Sample

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* There is an impact of extensive foreign investments in the United States taking place especially in recent years * Even some of the best known “American” products and brands are now produced by foreign firms * American companies such as Coca-Cola, Starbucks, McDonalds, the Gap and Levi’s are found in Japan, Australia, Singapore and nearly every European nation * One out of six jobs is tied to international trade and investment * All managers need to have a basic knowledge of international trade to be able to meet the challenge of global competition * Consultants and managers often use the word globalization in describing a firm’s strategy for beating their competitors * HOWEVER…globalization and it’s root, global, are overused and misused in international business because of the prestige that managements believe these words bring to their companies * A global company is an organization that:

-Searches the world for market opportunities, threats from competitors, sources of products, raw materials, knowledge, innovation, and financing, and personnel. (It has global vision) -Maintains a presence in key markets around the world

-Looks for similarities, not differences, among markets
-Standardizes operations worldwide in one or more of the firms functional areas -integrates its operations worldwide
* Multinational company is a company with a number of overseas operations, each of which is left to adapt its products and marketing strategy to what local managers perceive to be unique aspects for their individual markets * International business: business whose activities are carried out across national borders. * Foreign business: the operations of a company outside its home or domestic market-business that takes place within a foreign country * Multidomestic company: (MDC) an organization with multicountry affiliates, each of which formulates its own business strategy based on perceived market differences * Global company: (GC) an organization that attempts to standardize and integrate operations worldwide in most or all functional areas * International company: (IC) a global or multidomestic company * China was the world’s leading manufacturing country for about 1800 years until Britain took over in 1840

* The history of international business dates back to before the time of Christ, Phoenician and Greek merchants who were sending representatives abroad to sell their goods * Politics, the arts, agriculture, industry, public health and other sectors of human life were influenced by the goods and ideas that came with trade * The rise of the Ottoman Empire before 1300 influenced the emerging trading routes for people, goods, money, animals and microorganisms that spanned from England to China, across the Mediterranean and Northern Africa, and through Central Asia and the Indian Ocean region * The 17th and 18th centuries have been termed the “age of mercantilism” because the power of nations depended directly on the sponsorship and control of merchant capital, which expanded under the direct subsidization and protection of national governments * Many multinational companies existed in the late 1800’s * Economic globalization: the tendency toward an international integration of goods, technology, information, labor and capital, or the process of making this integration happen * Five major kinds of drivers all based on change, are leading international firms to the globalization of their operations: 1. Political

-progressive reduction of barriers to trade and foreign investment by most governments, which is hastening the opening of new markets by international firms that are both exporting to them and building production facilities in them -the privatization of much of the industry in formerly communist nations and the opening of their economies to global competition 2. Technological

-advances in computers and communications technology are permitting an increase flow of ideas and information across borders, enabling customers to learn about foreign goods 3. Market
-as companies globalize, the also become global customers
-Finding the home market saturated sends firms into foreign markets (84% of the respondents expect that international markets will generate most of their growth in the next five years 4. Cost
-economies of scale to reduce units of costs are always a management goal Globalizing product lines is one way of doing this by reducing development, production and inventory costs 5. And competitive

-Companies are defending their home markets from competitors by entering the competitor’s home markets to distract them. * Foreign direct investment: direct investments in equipment, structures, and organizations in a foreign country at a level that is sufficient to obtain significant management control: does not include mere foreign investment on stock markets * Exporting: transportation of any domestic good or service to a destination outside a country or a region * “Expanding trade by collectively reducing barriers is the most powerful tool that countries, working together, can deploy to reduce poverty and raise living standards”-Horst Kohler and James Wolfensohn (Arguments supporting globalization) * Free trade enhances socioeconomic development: free trade is the best strategy for advancing the world’s economic development (almost every economist agrees on this) * Free trade promotes more and better jobs: around 40 million jobs were created that were destroyed in the US over the past two decades * Concerns with globalization: it has produced uneven results across nations and people * Globalization has had deleterious effects on labor and labor standards

* Lastly it has contributed to a decline in environmental and health conditions * International business differs from domestic business because a firm operation across borders must deal with the forces of three kinds of environments: Domestic, foreign and international. * Environment: all the forces surrounding and influencing the life and development of the firm * Uncontrollable forces: external forces over which management has no direct control, although it can exert an influence * 11 external forces: competitive, distributive, economic, socioeconomic, financial, legal, physical, political, sociocultural, labor and technological (pp.23) * Controllable forces: internal forces that management administers to adapt to changes in the uncontrollable forces * Domestic environment: all the uncontrollable forces originating in the home country that surround and influence the firm’s life and development

* Foreign environment: all the uncontrollable forces originating outside the home country that surround and influence the firm * International environment: interaction between domestic and foreign environmental forces or between sets of foreign environmental forces * Self-reference criterion is probably the biggest cause of international business blunders: unconscious reference to one’s own cultural values when judging behaviors of others in a new and different environment Chapter 2: International Trade and Foreign Direct Investment * Large international firms invest overseas and they also export * Both means of supplying overseas markets-exporting to and production in those markets- are essential to most major US corporations * Smaller firms also have operations overseas

* International trade includes exports and imports
* Foreign direct investment – international companies much make to establish and expand their overseas operations * Foreign sourcing: the overseas procurement of raw materials, components, and products * One fourth of everything grown or made in the world is now exported * The extensive growth in the level of overall worldwide trade in services means that all of the regions and essentially all of the primary nations have experienced an absolute increase in dollar volume of service exports * The export growth of individual nations should be a warning to managers that they must be prepared to meet increased competition from exports to their own domestic markets * The largest exporters and importers of merchandise are generally developed countries * Direction of trade: more than 70% of exports from developed economies go to other industrialized nations, not to developing countries * The direction of trade frequently changes over time among nations or regions in the world

* American exporters have made major inroads in developing country markets, which in turn are selling more to the United States * …this is because increasing ability to export manufactured goods and the growing intracompany trade among international companies affiliates * The US is fast approaching the 50-50 split in exports to developing and developed nations * Portfolio investment: the purchase of stocks and bonds to obtain a return on the funds invested * Direct investment: the purchase of sufficient stock in a firm to obtain significant management control * Annual FDI outflows: is the amount invested each year into other nations * If a nation is continuing to receive appreciable amounts of foreign investment, its investment climate must be favorable * …this means that the political forces of the foreign environment are relatively attractive and that the opportunity to earn a profit is greater there than elsewhere * Historically, foreign direct investment has followed foreign trade * Engaging in foreign trade is typically less costly and less risky than making a direct investment into foreign markets * United States is by far the largest foreign investor

* Why enter foreign markets? – managers are always under pressure to increase the sales and profits of their firms and when they face a mature, saturated market at home, they begin to search for new markets outside the home country * There they find that markets with a rising GDP per capita and population growth appear to be viable candidates of their operations * Also the economies of some nations where they are not doing business are growing at a considerably faster rate than is the economy of their own market * Preferential trading arrangement: an agreement by a small group of nations to establish free trade among themselves while maintaining trade restrictions with all other nations * Many of the foreign markets are growing at a faster rate than is the home market * Other reasons to enter foreign markets is improved communication, obtain greater profits through greater revenue, lower cost of goods sold and higher overseas profits as an investment motive * Often a firm will go abroad to protect its home market

* Export processing zone: a government designated zone in which workers are permitted to import parts and materials without paying importing duties, as long as those imported items are then exported once they have been processed and assembled * In-bond plants (maquiladoras): production facilities in Mexico that temporarily import raw materials, components, or parts duty free to be manufactured, processed, or assembled with less expensive local labor after which the finished or semi-finished product is exported * Changing the method of going abroad from exporting to overseas production is often necessary to protect foreign * Few developed nations process sufficient domestic supplies of raw materials * Many large global and multidomestic firms with numerous manufacturing subsidiaries all over the world began their foreign operations by exporting * Then the often established sales companies overseas to market their exports Chapter 3: Theories of International Trade and Investment

* Economists are commonly found in governments as policy makers and advisors to government leaders worldwide * Mercantilism: an economic philosophy based on the belief that a nation’s wealth depends on accumulated treasure usually gold and to increase wealth government policies should promote exports and discourage imports * Import restrictions such as import duties reduced imports while government subsidies to exporters increased exports * Those acts creates a trade surplus in addition to protecting jobs within the mercantilist nation * Theory of absolute advantage argues that market forces, not government controls, should determine the direction, volume, and composition of international trade

* Absolute advantage: theory that a nation has absolute advantage when it can produce a larger amount of a good or service for the same amount of inputs as can another country or when it can produce the same amount of a good or service using fewer inputs than could another country * Comparative advantage: theory that a nation having absolute advantage in the production of two goods with respect to another nation has a comparative advantage in the production of the good in which its absolute disadvantage is less * With comparative advantage all can specialize in what they do best and therefore be more efficient * Offshoring: locating activities in another nation

* Outsourcing: an arrangement where one or more activities that could be provided in-house are instead provided by another company * Factor endowment: Heckscher-Ohlin theory that countries export products requiring large amounts of their abundant production factors and import products requiring large amounts of their scarce production factors * When these countries trade each will obtain at a lower price those goods that require large amounts of the production factor that is relatively scarce in their own country and both will benefit from the transaction * There are some goods though that the freight charges are so high that the landed cost (export sales price plus transportation charges) is greater than the cost of a locally made product – in that case there will be little trade * Still there will be a little trade taking place due to differences in taste * Differences in cultures, climates, income levels, and population structures can produce diversity in preferences and thus influence trade patterns * Money can also change the direction of trade

* Exchange rate: the price of one currency stated in terms of another currency * The exchange rate helps determine whether it is more advantageous to buy locally or to import * Currency devaluation: the lowering of a currency’s price in terms of other currencies * Linder theory of overlapping demand – stated that customers’ tastes are strongly affected by income levels and therefore a nation’s income per capita level determines the kinds of goods they will demand * The previous theory had more to do with the expectations that developed countries would more likely trade with developing countries, which have very different factor endowments, rather than with other developed countries that would have similar factor endowments. * International product life cycle (IPLC): a theory explaining why a product that begins as a nation’s export eventually becomes its imports -US exports – foreign production begins – foreign competition in export markets – import competition in the United States

* Production techniques and equipment seem to have a cycle from initial development and use in industrially advanced countries to eventual adoption in developing nations * This cycle is important because production technologies and equipment can be important exports from industrialized countries * National competiveness: a notion’s relative ability to design, produce, distributive, or service products within an international trading context while earning increasing returns on its resources * Michael Porter’s Diamond Model of national advantage claims that four kinds of variables will have an impact on the ability of the local firms in a country to utilize the country’s resources to gain a competitive advantage: demand conditions, factor conditions, related and supporting industries, and firm strategy, structure, and rivalry * International trade occurs primarily because of relative price differences among nations. * These differences stem from differences in production costs which result from, differences in endowments of the factors of production, differences in the levels of technology that determine the factor intensities used, differences in the efficiencies with which these factors intensities are utilized and lastly foreign exchange rates

* Monopolistic advantage theory: theory that foreign direct investment is made by firms in oligopolistic industries possessing technical and other advantages over indigenous firms * Cross investment: foreign direct investment by oligopolistic firms in each other’s home countries as a defense measure * Internationalization theory: an extension of the market imperfection theory: the concept that to obtain a higher return on its investment, a firm will transfer its superior knowledge to a foreign subsidiary rather than sell it in the open market * Dynamic capability: theory that for a firm to successfully invest overseas, it must have not only ownership of unique knowledge or resources but the ability to dynamically create and exploit these capabilities over time * Eclectic theory of international production: theory that for a firm to invest overseas, it must have these kinds of advantages: ownership specific, internalization, and location specific * One commonality to all of these theories that is supported by empirical tests is that the major part of direct foreign investment is made by large, research-intensive firms in oligopolistic industries * Also these theories offer reasons companies find it profitable to invest overseas

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