chapter one

The Rapid Change of International Business

McGraw-Hill/Irwin International Business, 11/e

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
Appreciate the dramatic internationalization of markets Understand the various names given to firms that have operations in more than one country

Understand the five kinds of drivers, all based on change, that are leading international firms to globalize
Comprehend why international business differs from domestic business Describe the three environmentsdomestic, foreign, and international--in which an international firm operates

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International Business Terminology

International business Foreign business Multidomestic company (MDC) Global company (GC) International company (IC)

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International Business Terminology,

contd.

International Business
A business whose activities are carried out across national boarders

Foreign Business
The operations of a company outside its home or domestic market

Multidomestic Company
An organization with multicountry affiliates Each formulates its own business strategy on perceived market differences
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International Business Terminology,

contd.

Global Company
an organization that attempts to standardize and integrate operations worldwide in most of all functional areas

International Company
A global or multidomestic company

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History of International Business

Early traders
Well before the time of Christ, Phoenician and Greek merchants China stimulated the emergence of an internationally integrated trading system all roads lead to China

17th Century mercantilism/colonialism

British East India Company Dutch East India Company Portugal and France
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Globalization
Globalization
Coined by Theodore Levitt as if the entire world (or major regions of it) were a single entity; [such an organization] sells the same things in the same way everywhere

Economic Globalization
International integration of goods, technology, information, labor, and capital Process of making this integration happen
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Table 1.1 Globalization Rankings: The KOF Index of Globalization and the A.T Kearney/Foreign Policy Globalization Index

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Globalization Forces

Political forces
Reduction of barriers to trade and foreign investment by governments Privatization of former communist nations

Technological forces
Advances in computers and communications technology Internet and network computing
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Globalization Forces, contd.

Market forces
Globalizing companies become global customers

Cost forces
Goal for economies of scale to reduce unit costs

Competitive forces
Increase in intensity due to explosive growth in international business

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Explosive Growth
Foreign Direct Investment and Exporting
FDI - Direct investment in equipment, structures, and organizations in a foreign country level sufficient to obtain significant management control (Table 1.2) Exporting transportation of any domestic good/service to a destination outside a country or region
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Table 1.2 FDI Indicators and Multinational Company Statistics (billions of dollars and percentages)

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Explosive Growth
Number of International Companies
UNCTAD - United Nations agency in charge of all matters relating to FDI and international corporations. 1995 45,000 parent companies with 280,000 foreign affiliates ($7 trillion in sales) 2004 70,000 parent companies with 690,000 foreign affiliates ($19 trillion in sales)
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Table 1.3 Ranking of International Companies and nations according to GNI (Atlas Method) or Total Sales

Note: Belgium (B), China (PRC), France (F), Germany (G), Italy (It), Netherlands (N), Switzerland (S), United Kingdom (U.K.), and United States (U.S.). Source: World Development Indicators database, http://devdata.worldbank.org/data-query/ (July 4, 2006); and Fortune 2005 Global 500, http://money.cnn.com/magazines/fortune/global500/2005 (July 4, 2006).

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Globalization Debate And You

World Trade Organization (1999, Seattle)
Extensive public protests about globalization and the liberalization of international trade

Debate
Waged by diametrically opposed groups with extremely different views on consequences of globalization Dramatic reductions in worldwide poverty are contrasted with anecdotal stories of people losing their livelihoods under the growing power of multinationals

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Environments of International Business

Environment
All the forces influencing the life and development of the firm

Forces
External Forces (Uncontrollable) Forces over which management has no direct control Internal Forces (Controllable) Forces that management can use to adapt to external forces
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External Forces
Competitive
Kind, number, location

Distributive
For distributing goods and services

Economic
GNP, unit labor cost, personal consumption expenditure

Socioeconomic
Characteristics of human population

Financial
Interest rates, inflation rates, taxation
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External Forces, contd.

Legal
Laws governing how international firms must operate

Physical
Topography, climate, and natural resources

Political
Forms of government, and international organizations

Sociocultural
Attitudes, beliefs, and opinions

Labor
Skills, attitudes of labor

Technological
Equipment and skills that affect how resources are converted to products
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Internal Environmental Forces

Factors of Production
Capital, raw materials, and people

Activities of the organization

Personnel, finance, production, and marketing

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Why Is International Business Different?

Domestic Environment
All the uncontrollable forces in the home country that surround and influence the firms life and development

Foreign Environment
All the uncontrollable forces originating outside the home country that surround and influence the firm different values difficult to assess interrelated

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Why Is International Business Different? contd.

International Environment
Interaction between domestic and foreign environmental forces or between sets of foreign environmental forces Increased complexity for decision-making

Decision making more complex

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International Business Model

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