Introduction to International business - {$SEO TITLE} - International Busin… · Introduction to...

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Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010

Introduction to

International business

Chapter 1

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Patterns and trends

• Rapid growth in:

– World trade (exports and/or imports)

– Foreign direct investment (fdi)

– Foreign portfolio investment

– Cross-border mergers/acquisitions.

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Growth in world trade

Figure 1.1 Changes in trade and capital flows Sources: World Bank, UNCTAD (various)

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Growth in fdi

Figure 1.2 FDI inflows: global and by groups of economies, 1980–2007 Source: World Investment Report (UNCTAD 2008), p. 3

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Reasons for increased

internationalisation • More ‘open’ global markets

• More globally dispersed value chains

• Move from bi-polar to tri-polar (triad)

• Growth of Regional Trading Arrangements

(RTAs)

• Growth of bilateral treaties

– Bilateral Investment Treaties (BITs)

– Double Taxation Treaties (DTTs).

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More ‘open’ global markets

Item 1993

1995 1997 1999 2001 2003 2005 2007

Number of countries

that introduced

change

56 63 76 65 71 82 92 58

Number of regulatory

changes

100 112 150 139 207 242 203 98

More favourable to fdi 99 106 134 130 193 218 162 74

Less favourable to fdi 1 6 16 9 14 24 41 24

Source: Adapted from World Investment Report (2008)

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More globally dispersed value chains (1)

Average annual growth rates (%)

2007 ($bn) 1986–90 1991–95 1996–2000

Sales of foreign

affiliates of MNEs

31,197 19.3 8.8 8.4

Total exports of

goods and

services

7430 15.8 8.7 4.2

Employment of

foreign affiliates

(thousands)

81,615 5.3 5.5 11.5

Total assets of

foreign affiliates

68,716 17.7 13.7 19.3

Source: Adapted from World Development Report 2008

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More globally dispersed value chains (2)

Region 1990–95

(annual

average)

1996-

2000

2001 2002 2003 2004 2005 2006 2007

Developed

countries

145 581 610 484 364 410 680 920 1248

Developing

countries

74 198 206 220 220 265 310 405 495

South East

Europe and

CIS

6 8 10 11 20 30 31 58 87


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Bi-polar to tri-polar (triad)

Figure 1.3 Growth of the global economy, 1992–2020 (index numbers, USA =100) *Forecasts assume countries grow at regional rates projected in the World Bank’s Global Economic Prospects report. Source: World Bank and author’s own work

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Transnationality index (TNI)

• TNI is the average of three ratios:

– Foreign sales : total sales

– Foreign employment: total employment

– Foreign assets : total assets.

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World’s top 5 multinationals ranked by

foreign assets (and TNI)


Ranking

Foreign

assets

Transnationality

index

Company Country Industry Transnationality

index (%)

1 71 General

Electric

USA Electrical and

electrical equipment

53

2 14 British

Petroleum

UK Petroleum 80

3 87 Toyota Motor Japan Motor vehicle 45

4 34 Royal

Dutch/Shell

UK/Netherla

nds

Petroleum 70

5 84 Exxon/Mobil

Corporation

USA Petroleum 68

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World’s top 5 multinationals ranked by the

transnationality index (and foreign assets), 2006

Ranking

Transnationality

index

Foreign assets Company Country Industry Transnationality

index (%)

1 92 Barrick Gold

Corporation

Canada Gold/Mining 94

2 37 Xstrata plc UK Mining and

quarrying

92

3 48 Linde AG Germany Industrial

trucks/ trailers

89

4 77 Pernard Ricard

SA

France Beverages 87

5 68 WPP Group UK Business

Services

87


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Transnationality index for the world’s largest 100

MNEs in their home economies, 1990 and 2006

Average TNI (%) Number of MNEs

Economy 1990 2006 1990 2006

European Union 56.7 74.7 48 52

France 50.9 63.8 14 15

Germany 44.4 54.8 9 14

UK 68.5 72.8 12 13

North America 41.2 60.2 30 25

US 38.5 57.8 28 22

Canada 79.2 78.1 2 3

Japan 35.5 52.1 12 9

Rest of the World n.a. n.a. 10 14

All Economies 51.1 61.6 100 100

Source: Adapted from World Investment Report (2008)

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Transnationality Index of the 100 largest

MNEs from developing economies: by

region 2006 Top 100 MNEs from

developing economies

Average TNI

Region/economy

of which

TNI Number of companies

Africa (South Africa) 45.0 11

South-East Asia 52.3 20

East Asia 58.6 56

West Asia 56.5 3

Latin America and the Caribbean 40.1 10

Total 53.9 100

Source: Adapted from World Investment Report 2008

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Internationalisation Index (II)

• Number of host economies in which the MNE

has foreign affiliate is a useful indicator of

‘internationalisation’.

• Internationalisation Index (II)

– Ratio of MNE foreign affiliates to total

affiliates, expressed as a percentage.

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Top 5 MNEs, ranked by number of host

economies in their affiliates

Company Home country No. of host

economies

Internationalisati

on index (II)%

Transnationality

index (TNI)%

Deutsche Post AG Germany 111 83 37

Royal Dutch/Shell

Group

Netherlands/United

Kingdom

98 56 70

Nestle SA Switzerland 96 93 83

Siemens AG Germany 89 75 66

BASF AG Germany 88 78 57

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Other global patterns and trends

Growth in:

• Regional Trading Arrangements (RTAs)

– Bilateral Investment Treaties (BITs)

– Double Taxation Treaties (DTTs)

• Sovereign Wealth Funds (SWFs)

• Global security – related costs.

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Regional Trading Arrangements (RTAs)

• Free trade areas

• Customs unions

• Common markets

• Economic unions.

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Free trade area

• Where member countries reduce or abolish

restrictions on trade with each other while

maintaining their individual protectionist

measures against non-members.

20


Custom unions

• Where, as well as freeing trade among

members, a common external tariff is

established to protect the group from imports

from any non-member.

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Common market

• Where the customs union is extended to

include the free movement of factors of

production as well as products within the

designated area.

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Economic union

• Where national economic policies are also

harmonised among member states within the

common market.

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International competitiveness (1)

• Most widely used indicator is Relative Unit

Labour Costs (RULCs)

• RULC

Relative Labour Costs × Relative Exchange Rate

Relative Labour Productivity

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Country

Total labour costs ($ per

hour)

Total labour costs ($ per

hour Index: UK = 100)

Labour productivity

(Index UK = 100)

Mexico 2.6 21.8 35.2

Korea 13.6 20.9 48.4

France 24.6 95.7 118.1

UK 25.7 100.0 100.0

Japan 21.8 84.8 82.4

US 23.7 92.2 116.2

Germany 33.0 128.4 109.7

Source: Adapted from US Department of Labor (2007) Hourly Compensation Costs in Manufacturing: OECD (2007)

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Country Rank Country Rank

USA 1 Austria 8

Germany 2 Singapore 9

Finland 3 Japan 10

Sweden 4 UK 11

Denmark 5 Hong Kong 12

Switzerland 6 Norway 13

Netherlands 7 Canada 14

Source: Global Competitiveness Report 2007 – 8 (adapted)

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Globalisation

• Different perspectives

– Economists

– Political scientists

– Sociologists

– International relations specialists.

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Globalisation definitions (1)

• ‘…the process of transformation of local phenomena into global ones. It can be described as a process by which the people of the world are unified into a single society and function together. This process is a combination of economic, technological, sociocultural and political forces’ (Croucher, S. 2003).

• ‘…a widening, deepening and speeding up of interconnectedness in all aspects of contemporary social life from the cultural to the criminal, the financial to the spiritual’ (Held et al. 1999).

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• ‘….increasing global interconnectedness, so that

events in one part of the world are affected by, have

to take account of, and also influence, other parts of

the world. It also refers to an increasing sense of a

single global whole (Tiplady, R. 2003).

• ‘…the worldwide movement towards economic,

financial, trade and communications integration.

Globalisation implies opening out beyond local and

nationalistic perspectives to a broader outlook of an

interconnected and inter-dependent world with the

free transfer of capital, goods and services across

national frontiers’ (Business Dictionary).

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• ‘…refers to the shift toward a more integrated and

interdependent world economy…[through] the

merging of historically distinct and separate

national markets into one huge global market

place’ (Hill, C. 2005, p.6).

• ‘…process by which the whole world becomes a

single market. This means that goods and

services, capital and labour are traded on a

worldwide basis, and information and the results

of research flow readily between countries’ (Black,

J. 2002).


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• ‘…reflects a business orientation based on the

belief that the world is becoming more

homogenous and that distinctions between

national markets are not only fading but, for some

products, will eventually disappear’ (Czinkota, M.,

Ronkainen, I., Moffat, M. 1999, p.454).


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Globalisation characteristics (1)

• Shrinking space

• Shrinking time

• Disappearing borders.

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• New markets

• New tools of communications

• New actors

• New rules and norms.

Globalisation characteristics (2)

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New markets

• Growing global markets in services – banking,

insurance, transport.

• New financial markets – deregulated, globally

linked, working around the clock, with action at

a distance in real time, with new instruments

such as derivatives.

• Deregulation of antitrust laws and growth of

mergers and acquisitions.

• Global consumer markets with global brands.

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New tools of communication

• Internet and electronic communications linking

many people simultaneously.

• Cellular phones and mobile telephony.

• Fax machines.

• Faster and cheaper transport by air, rail, sea

and road.

• Computer-aided design and manufacture.

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New actors (1)

• Multinational corporations integrating their

production and marketing, dominating world

production.

• The World Trade Organisation – the first

multilateral organisation with authority to force

national governments to comply with trade

rules.

• A growing international network of non-

governmental organisations (NGOs).

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New actors (2)

• Regional blocs proliferating and gaining

importance – European Union, Association of

South-East Asian Nations, Mercosur, North

American Free Trade Association, Southern

African Development Community, among

many others

• More policy coordination groups : G-7, G-8,

OECD, IMF, World Bank.

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New rules and norms (1)

• Market economic policies spreading around the

world, with greater privatisation and liberalisation

than in earlier decades

• Widespread adoption of democracy as the choice

of political regime

• Human rights conventions and instruments

building up in both coverage and number of

signatories – and growing awareness among

people around the world

• Consensus goals and action agenda for

development.

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New rules and norms (2)

• Conventions and agreements on the global

environment – biodiversity, ozone layer, disposal

of hazardous wastes, desertification, climate

change

• Multilateral agreements in trade, taking on such

new agendas as environmental and social

conditions

• New multilateral agreements – for services,

intellectual property, communications – more

binding on national governments than any

previous agreements.

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Globalisation outcomes

• Hyperglobalists: powerless nations at the

mercy of ‘footloose’ MNEs which grow ever

stronger

• Transformationalists: no clear predictions

possible as to eventual outcomes of

globalisation.

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Transformationalist view of

globalisation • Conflicting tendencies

– Universalisation v particularisation

– Homogenisation v differentiation

– Integration v fragmentation.

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Globalisation and nation state

• Issues include:

– Loss of competence

– Loss of autonomy

– Loss of legitimacy.

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