lecture 15 revision (7)

7/28/2019 Lecture 15 Revision (7)

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International Business

Revision

Globalization

FDI

Drivers of FDI Risk associated with FDI


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Why MNEs target new markets???

What is the process called ???


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Globalisation

World trade is as old as world civilization, and it can be dated backto Stone Age when people use to trade food for firestone to keepthemselves warm

World Business has developed and evolved in parallel with thegrowth and evolution of world civilisation

Human mind which is one of the most complex parts of humananatomy has adapted to the human needs and helped in creatingnew methods and products.

The world being a diverse place; we can find diversity in all

segments of life. With 6 billion people ,200 nations speaking 10,000 different

languages, with $100- $40,000per/capita income, trading in 180currencies.


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Globalisation

Globalisation is a process which is evolving for over thousands ofyears.

The footprint of world business can be tracked in various stages, theWorld Exploration in 1500s, 400 years of Colonialism till 1900 andtimes of International Co-operation starting from early 1900.

The globalisation movement is the trend toward increasinginterdependency among world markets and the diffusion of newideas, technologies, products, services and life styles through theinternational markets (Hill, 2005).

When business environment saturates in home country thancompanies start selling the products across borders and overseas inan attempt to gain bigger market share and increase their profitmargins.


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Phases of Globalisation

Phases Period Triggers Key Characteristics

First Phase 1830late 1800

Peeking 1880

Introduction of rail

Roads and ocean

trade

Rise of manufacturing,

cross border trade

Second Phase 1900- 1930 Rise of electricity and

Steel Production

Emergence of USA

MNEs

Third Phase 1948-1970 GATT (General

agreement on Tariff

and trade) rebuild EU

after ww2

Reduce trade barriers,

single market, single

currency

Fourth Phase 1980-to present date Radical growth in IT,

Communication,

manufacturing ,

Growth in emerging

Markets.

FDI growth, shift in

manufacturing base


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Globalization

$100 billion in 1960

2008-9 global trade accounts for a substantialproportion of the world economy $10 trillion.

$10,000,000,000,000

Trade between countries increase capitaltransfer, Knowledge transfer, and spill over

effects of skills. The watch dogs of world trade are IMF and

WTO


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Entry strategies

Entry strategies vary according to the firm, the industry and

the business environment in the foreign location.

Exportinginvolves a minimal commitment and no

organizational presence.

Production under licenceoffers flexibility and lower

commitment to the country than FDI, but carries risks, such

as weak control over quality and working conditions.

FDIinvolves greater commitment, either greenfieldor

acquisition. Control over operations is an advantage over

outsourcing.

Emerging MNEs are a growing force in FDI.


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Internationalization strategies


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FDI motives

Marketconsiderations

Proximity to markets is apullfactor. (Heavy goods,

automotive, Costs)

Saturation in home market is apush factor.

Advantages in production, e.g. low-cost labour.

Technological capacity and network linkages also feature.

Resource-relatedmotives Recall internalization (OIL)

Desire for control over specific assets, such as brands or

businesses.

Marketconsiderations

Proximity to markets is apullfactor. (Heavy goods,

automotive, Costs)

Saturation in home market is apushfactor.

Advantages in production,e.g. low-cost labour.

Technological capacity and network linkages also feature.

Resource-relatedmotives Recall internalization (OIL)

Desire for control over specific assets, such as brands or

businesses.


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FDI Requirements

Over the past few decades FDIhas become an indicator forcountries economic growth andpolitical stability.

Any region which has a truedemocratic government, where

there is free an independentjudiciary and the people of thecountry can easily voice theirthoughts on all forms of mediafall is the politically stablecountry.

Triad nations are a prime exampleof good practice for FDIinvestments. They all havedemocracies, freedom of speech,and market driven economies.


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Productivity and growth


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Risky Business

Risks inInternational

Business

Commercial

Risk

Financial

Risk

Country

Risk

CrossCultural

Risk

Cultural Risk; Negotiation patterns,

Decision making styles, ethical

practices, Cultural differences

Commercial risks; Week Partner,

Operational Problems, Timing of

entry, competitive Intensity Currency; Asset valuation, foreign

taxation, currency exposure,

Inflationary and transfer pricing.

Country Risk; Government

intervention, barriers to trade, red

tape, corruption, legal issues,

property rights, social and political

unrest and instability.


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R


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Who are the Players ?

MNE; a large company with many recourses whose business

activities are performed network of subsidiaries located in

multiple regions / countries.

SME; Small and medium size firms 500 or less employees

Born Global; Entrepreneurial firms that initiate international

business from or near their founding.

NGO; Non-governmental organizations (NGO) are non profit

organisation that peruse special causes and serve as an

advocate for the arts, education, politics, religion, and

research.


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Why Big Boys follow

Internationalisation Strategies?

Bigger market Share

Increase sales, Profits, better serve customers, brand

loyalty.

Low-cost or superior production factors.

Optimize sourcing activities, develop economies of

scale, confront competition.

Develop rewarding relationships with foreignpartners

Gain new ideas for improving products and services.


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Reflective Thinking

Distinguish between International Trade and

Globalisation of Markets?

What is the difference between exporting and FDI?

Difference between International trade and domestictrade? Explain the risks?

Who are the major participants in IB?

Difference between MNEs and SMEs? What are the key motives for firms to go global?

lecture 15 revision (7)

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