Intenational Marketing Business

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INTRODUCTION TO

GLOBALISATION ANDINTERNATIONAL

BUSINESS


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INTERNATIONAL BUSINESS AND

GLOBALISATION

International Business is defined as

(1)a cross- border economic activities and

(2)the action of doing business abroad.

Global Business is defined as business around

the globe. Global activities include both

(1) international (cross-border) activities covered

by IB and

(2) domestic business activities

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Globalization Globalisation is the trend toward greater

economic, cultural, political, andtechnological interdependence among

national institutions and economies. It is

characterised by denationalisation ( nationalboundaries becoming less relevant)


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Globalization of markets:The merging ofdistinct and separate national markets intoone huge global marketplace.

Benefits:

Reduces Marketing Cost

Creates New Market Opportunities

Levels Uneven Income Streams

Globalisation of Markets


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Globalization of Production The tendency among firms to source goods

and services from different locations around

the globe to take advantage of cost and

quality of factors of production such as

labour, energy, land and capital.

Benefits

Access to Lower-cost Workers

Access to technical Expertise

Access to Production inputs21/09/2013 5


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Drivers of Globalization1. Falling Barriers to Trade and Investment

- WTO (enforces rules on Intl trade)

- Regional Trade Agreements (eg. NAFTA,EU, APEC, ECOWAS)- smaller groups ofnations integrating their economies to fostertrade and boost cross-border investment

- Trade and National Output (indicators :GDP, GNP) Economic Growth is greater innations that have become more open totrade eg. China, India and Russia.

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Drivers of Globalization2. Technological Innovations although

falling trade barriers and investmentencourage globalisation, technologicalinnovation is accelerating the process.Advancements in information technology

and transportation methods are making iteasier to move data, goods and equipmentaround the world.

- E- mail and videoconferencing-operating

across borders and time zones complicatesthe job of coordinating and controllingbusiness activities. Technology can speed

the flow of information and ease the task ofcoordinatin and control.21/09/2013 7


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Drivers of Globalization cont.-Internet and World Wide Web

Companies use internet to quickly andcheaply to contact managers in distantlocations to eg inquire about production,sales, distribution and other issues.

- Intranets and Extranets

- Intranets give employees access tocompany data. Extranets on the other hand

gives suppliers, distributors and companycustomers access to companys database.

- Advancements in transportation

Technologies- reliance on shippedim orts ust-in-time deliver etc.21/09/2013


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The Globalization Debate

Globalisation means different thing to different

people. Impact of globalisation is perceived

differently.

(1)Globalisation Impact on Jobs

Against - groups opposing globalisation blame it

for eroding standard of living and ruining ways

of life. They argue that globalisation

eliminates jobs and

lowers wages in developed nations and

exploits workers in developing nations21/09/2013 9


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The Globalization Debate Cont.For- supporters of globalisation credits it with

improving standards of living and making possible new

ways of life. They argue that globalisation: Increases wealth and efficiency in all nations

Generates labour market flexibility in developed

nations

Advances economies of developing nations

(2) Globalisation Impact on Labour, Environments and

Marketscompanies will prefer to locate operations to

where labour and environmental regulations are leastrestrictive

Labour StandardTrade Unions claim globalisation

reduces labours bargaining power

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The Globalization Debate Cont.(3) Globalisation and Income Inequality

Inequality within Nations Inequality between nations

Global inequality

(4) Globalisation and National Sovereignty

National Sovereignty involves the idea that a

nation state is

(a)Autonomous

(b) Can freely select its government

(c) Cannot intervene in the affairs of other nations

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The Globalization Debate Cont(d) Can control the movements across its borders

(e) Can enter into binding internationalagreements. Opposition groups allege that

globalisation erodes national sovereignty

Globalisation: Menace to Democracy-empowers supernational institutions at the

expense of national govts (eg WTO, IMF, UN

are led by appointed and not democraticallyelected representatives)

Globalisation: Guardian of Democracy-

supporters argue that globalisation has led tothe s read of democrac worldwide e . Human21/09/2013 12


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The Globalization Debate Cont

(5) Globalisations Influence on Culture

Protesters argue that globalisation is

homogenising our world and destroying its rich

diversity of cultures.

Supporters argue that globalisation allows us toprofit from our differing circumstances and skills

Trade allows countries to specialise in producing

goods and services they can produce mostefficiently. Nations can then trade with each

other to obtain goods and services they desire

but do not produce.21/09/2013 13


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Forms of International Business

Class if ied in to th ree broad categories

Trade: (indirect/direct exporting,

importing) Temporal Contracts: (licensing,

franchising, management/manufacturingcontracts)

Foreign Direct Investments: MNCs, Jointventures, mergers/acquisitions,

Wholly Owned subsidiaries.


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International Trade and Business

International Trade occurs when a firm

exports or imports goods or services.

International business is broader in

context than international trade even

though it is sometimes used narrowly

to mean international trade. It embraces

all forms of business transactionsacross a firms national borders.


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THEORIES OF TRADE

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Theories of Trade Mercantilist Theory Absolute Advantage Theory

Comparative Advantage Theory

Factor Endowments Theory

Product Life-Cycle Theory

New Trade Theory


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Mercantilist Theory 16th Century concept. To export is good, to import is to be avoided.

Export brings about payment to you, import

means you make payment (gold or silver) The best thing to do is to export and receive as

much payment as possible and maintain a trade

surplus. (Trade is a zero-sum game)

This theory does not see any advantage inimporting. Eg. deprivation of some consumer

items.


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Critique David Humes (1752) point out an

inconsistency in this theory;

Trade surplus between Ghana and Togo

will swell the domestic money supply andwill lead to inflation, However, theoutflows will contract money supply inTogo and prices will fall.

Eventually, Ghana will be the loser till thesurplus even out.


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Critique Smith (1776) debunked Mercantilist theory as a

zero-sum game.

Countries differ in their ability to produce

goods efficiently. Ghana may have absolute advantage in the

growing of cocoa because of climatic and good

soil conditions and accumulated expertise.

France or Spain may have similar advantages

in the production of wine.


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Absolute advantage Theory

Countries should specialize inproducing goods for which they havean absolute advantage and trade these

goods for the goods produced by othercountries.

Smiths basic argument is neverproduce at home something you can getat lower cost in other countries.

To Smith, trade is a positive sum game


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Comparative Advantage Theory

Ricardo (1817) take Smiths theory to a furtherstep.

What if one country has the absolute advantageof producing all goods? Can it derive benefits

from trade? A country must specialize in goods it produces

efficiently and import those it produces lessefficiently from other countries even if it can

produce them. (Difference in productivity) Unrestricted trade brings about a win-winsituation.


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Critique The theory deals with too many assumptions.

Does not take transportation costs into

account;

Assumption that resources are equal in bothcountries;

Not taken exchange rates into account;

Does not explore the possibility of moving rawmaterials internationally.

Does not take diminishing returns into account.


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Factor Endowment Theory Also known as Heckscher-Ohlin Theory (1933)

Comparative advantage arises from nationalfactor endowments such as land, labour,capital.

Nations have different factor endowments andthat explains cost differences.

Nations will export those goods that makeintensive use of factors that are abundant

locally and import goods that make use offactors that are locally scarce.

In theory, it is preferred but not practically.


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LEONTIFF PARADOX

States that the US should export capital

intensive goods and import labour

intensive goods

However it was discovered that the US

imports were less capital intensive than

US exports

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Product Life CycleTheory

Production starts from the owner of thetechnologys country (introduction stage).

It serves home markets and later exports toother advanced countries. Growth for

domestic markets and introduction in thosecountries)

Other countries start production and marketsget choked.

Developing countries take advantage ofproduction costs and export to originalproducer.


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New Trade Theory The world market will profitably support few

firms that enjoy substantial economies ofscale in their various industries.

Countries or firms may export certainproducts simply because they were earlyentrants into that industry. First moveradvantages create a barrier to entry.

Economies of scale leads to specialization. Economies of scale also results in decreasein unit costs of production.

Companies may excel not as a result of

factorv endowment but because of first


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Key factors of New Trade Theory

New trade theorists argue that luck,

entrepreneurship and innovation are key in

giving a firm first mover advantage.

Government support systems are key indetermining these factors.

In most advance countries, government

absorb R&D costs of certain technologies

thereby making them more competitive on

the world market.


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Porter's Diamond of

National Advantage


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Porter's Diamond of National Advantage

Classical theories of international trade propose

that comparative advantage resides in the

factor endowments that a country may be

fortunate enough to inherit. Factor endowments

include land, natural resources, labor, and thesize of the local population.

Michael E. Porter argued that a nation can

create new advanced factor endowments suchas skilled labor, a strong technology and

knowledge base, government support, and

culture.

Porter's Diamond of National


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Porter s Diamond of NationalAdvantage Cont.

Porter used a diamond shaped diagram as

the basis of a framework to illustrate the

determinants of national advantage. This

diamond represents the national playingfield that countries establish for their

industries.

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P t ' Di d f N ti l


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Porter's Diamond of National

Advantage

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P ' Di d f N i l Ad C


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Porter's Diamond of National Advantage Con

The individual points on the diamond and the diamondas a whole affect four ingredients that lead to a

national comparative advantage. These ingredients

are:

the availability of resources and skills,

information that firms use to decide which

opportunities to pursue with those resources and

skills, the goals of individuals in companies,

the pressure on companies to innovate and invest.

The points of the diamond are described as

follows:21/09/2013 33

1 F t C diti


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1- Factor Conditions

Factor conditions refers to inputs used as

factors of production - such as labour, land,natural resources, capital and infrastructure.

This sounds similar to standard economic

theory, but Porter argues that the "key" factors

of production (or specialized factors) are

created, not inherited. Specialized factors of

production are skilled labour, capital and

infrastructure.

A country creates its own important factors

such as skilled resources and technological

base.21/09/2013 34

1 Factor Conditions Cont


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1- Factor Conditions Cont.

The stock of factors at a given time is less

important than the extent that they areupgraded and deployed.

Local disadvantages in factors of production

force innovation. Adverse conditions such aslabor shortages or scarce raw materials force

firms to develop new methods, and this

innovation often leads to a national comparative

advantage.

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2 Demand Conditions


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2-Demand Conditions

Porter argues that a sophisticated domestic

market is an important element to producingcompetitiveness. Firms that face a

sophisticated domestic market are likely to sell

superior products because the market demands

high quality and a close proximity to such

consumers enables the firm to better

understand the needs and desires of the

customers.

A more demanding local market leads to

national advantage.21/09/2013 36

2 Demand Conditions Cont


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2-Demand Conditions Cont.

When the market for a particular product is

larger locally than in foreign markets, the localfirms devote more attention to that product than

do foreign firms, leading to a competitive

advantage when the local firms begin exporting

the product.

A strong, trend-setting local market helps local

firms anticipate global trends.

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3 Related and Supporting Industries


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3-Related and Supporting Industries

Porter also argues that a set of strong related and

supporting industries is important to the

competitiveness of firms. This includes suppliers and

related industries. This usually occurs at a regional

level as opposed to a national level. Examples include

Silicon valley in the U.S., Detroit (for the auto industry)and Italy (leather-shoes-other leather goods industry).

The phenomenon of competitors (and upstream

and/or downstream industries) locating in the same

area is known as clustering or agglomeration. Whatare the advantages and disadvantages of locating

within a cluster? Some advantages to locating close to

your rivals may be21/09/2013 38

3 Related and Supporting Industries Con


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3-Related and Supporting Industries Con

potential technology knowledge spillovers,

an association of a region on the part of consumerswith a product and high quality and therefore some

market power, or

an association of a region on the part of applicable

labour force.

Some disadvantages to locating close to your

rivals are

potential poaching of your employees by rivalcompanies and

obvious increase in competition possibly decreasing

mark-ups.21/09/2013 39

4 Firm Strategy Structure and Rivalry


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4-Firm Strategy, Structure, and Rivalry Local conditions affect firm strategy. For example,

German companies tend to be hierarchical. Italian

companies tend to be smaller and are run more likeextended families. Such strategy and structure helps

to determine in which types of industries a nation's

firms will excel.

In Porter's Five Forces model, low rivalry made an

industry attractive. While at a single point in time a firm

prefers less rivalry, over the long run more local rivalry

is better since it puts pressure on firms to innovateand improve. In fact, high local rivalry results in less

global rivalry.

Local rivalry forces firms to move beyond basic

advantages that the home country may enjoy, such as21/09/2013 40

The Diamond as a System


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The Diamond as a System

The effect of one point depends on the others. Forexample, factor disadvantages will not lead firms to

innovate unless there is sufficient rivalry.

The diamond also is a self-reinforcing system. For

example, a high level of rivalry often leads to the

formation of unique specialized factors.

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Government's Role


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Government s Role

The role of government in the model is to:

Encourage companies to raise their performance, for

example by enforcing strict product standards.

Stimulate early demand for advanced products.

Focus on specialized factor creation.

Stimulate local rivalry by limiting direct cooperation

and enforcing antitrust regulations.

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Criticisms about The Diamond Model


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Although Porter theory is renowned, it has a number

of critics. Porter developed this paper based on case studies

and these tend to only apply to developed economies.

Porter argues that only outward-FDI is valuable in

creating competitive advantage, and inbound-FDI

does not increase domestic competition significantly

because the domestic firms lack the capability todefend their own markets and face a process of

market-share erosion and decline. However, there

seems to be little empirical evidence to support that

claim.21/09/2013 43



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The Porter model does not adequately address therole of MNCs. There seems to be ample evidence that

the diamond is influenced by factors outside the home

country.

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Other foreign market analysis

Other foreign market analysis include Country Attractiveness Approach Does

the environment of the country support our

product, 2) Will that country be the bestplace to operate?

Country Risk Approach What are the risk

to be considered in entering the market so

far as that particular country is concerned

Objective Analysis of Markets Does the

market under consideration help us to

meet our cor orate ob ectives?21/09/2013 45


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PREPARATION TO ENTER FOREIGN

MARKETS CONTINUATION

1)RESOURCE BASED VIEW THEORY

This is where a firm builds on the human

capacity to create competitive advantage.

This can be done through training andplacing value on employees.

Ask questions e.g. Does the firm have the

human resource needed for that businessenvironment?

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2)INTERNATIONAL MARKET


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RESEACH This is the systematic

design,collection,recording,analysis,interpretatio

na and reporting of information pertinent to a

particular marketing decision of an internationalcompany. It may include acquisition

analysis,diversification analysis,market share

analysis and export research

Companies must have market intelligence inorder to be abreast with the market and adjust

products and services to suit the various

markets.21/09/2013 47



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RESEACH continued

Includes research into brand

preferences,brand awareness,brand

attitudes,purchase behaviour and market

segmentation

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INTERNATIONAL MARKET


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INTERNATIONAL MARKET

SELECTION - continuation

MARKET SCREENING VARIABLES

These include cost factors

(transportation,wage,land,financing

costs,tax rates

Resource Factors Supplies,raw

materials,labour,transportation and

logistics Demand Factors Market size and

growth,customer base)

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PREPARATION TO ENTER


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PREPARATION TO ENTER

FOREIGN MARKETS The five stage selection process are

1)Domestic regulations and management preferences

2)Initial Entry assessment (which markets are of no

interest to the firm irrespective of its attractiveness)

3)Competitive Environment (Porters Five forces- whichmarkets should be avoided due to intense competititon)

4) Marketing responsiveness (which markets are not

responsive to our marketing tools,Demand pattern

analysis,international product life cycle, income elasticitymeasurement etc.

5) Internal trade off analysis What are the uncertainties

in that particular market or what may we loose as a

company when we operate in that market?

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