BSB119 - Final Exam Notes (Summary of Lectures 1 to 12)

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Global Business Final Exam Notes DRIVERS AND METHODS Lecture 1: Introduction *Globalisation: shift towards a more integrated and interdependent world economy. International Business: Any business that has productive activities in two or more countries (multinational enterprise - MNE). *Globalisation of markets: Merging of historically distinct and separate national markets into a global marketplace in which the tastes and preferences of consumers in different nations are beginning to converge. However, significant differences in culture, politics and economies exist between countries and adaption of products and strategies to local conditions is often necessary for international business to succeed. *Globalisation of production: Sourcing goods and services from locations around the globe in an attempt to take advantage of national differences in the cost and quality of factors of production (labour, energy, land and capital), thereby allowing them to compete more effectively against their rivals Example: Boeing aircrafts use companies s for all over the world for different components (e.g UK, France, Canada, Sweden) Firms are better able to respond to international customer demand due to improvements in transportation technology e.g jet transport; temperature controlled containerized shipping and co-ordinated ship-rail truck systems *Globalisation of institutions: Institutions are needed to help manage, regulate and police the global marketplace and promote the establishment of multinational treaties to govern the global business system. Environmental factors facilitating globalisation 1. Liberalisation: reduction in the barriers to trade and foreign investment (cooperation among nations: WTO & RTAs) 2. Political environment: changing ideologies, privatisation and the emerging market economies 3. Rising disposable incomes: economic development and demand for greater variety of products 4. Technological change: transportation, communication, information processing and the Internet: Virtual Organisation, virtual workforce (global outsourcing) Driving forces of Globalisation 1. Declining Trade and Investment Barriers  ↓ in tariff rates & restrictions to FDI have made it easier to sell internationally  NTBs are one of the major issues now 2. Changes in Communication, Information and Transportation Technologies  Firms can link their worldwide operation into sophisticated networks  Firms can outsource service activities to different locations around the world Christina Meyers BSB119 Global Business Page 1 Law of One Price: In a competitive market free of transaction costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in the same currency. Prosperity or Impoverishment? - Impact of trade liberation & FDI barriers Prosperity 1. Stimulates economic growth – specialisation makes global economy more efficient 2. Raises income of consumers – decreases prices, increases income from exports and economic growth, increasing middle class 3. Creates jobs – exports „inshoring‟ Impoverishment 1. Job losses – firms move offshore to countries with lower labour costs, high unemployment and lower living standards e.g Pacific Brands 2. Growing income equality – Income gap between low and high skill workers rise 3. Food insecurity – developing countries priced out of market as global demand and competition for resources increases, livelihoods and resources depleted reducing availability and affordability of food for low income families 4. Environment degradation and climate change  Increasing CO 2s goods transported over greater distances around the globe  Manufacturers moving to developing countries with leaker labour and environment protection laws 5. Undermines national sovereignty  WTO, UN supplanting national governments Interdependency: Three Types 1. Financial – capital investment 2. Human resources – people moving around to do jobs 3. Natural resources – relying on others for raw products e.g China relies on us for coal *Global business has relevance to small firms due to:  Rise of mini MNEs  New opportunities and threats exist on a worldwide basis  Decreasing trade barriers  Technological development  Scan international marks for best suppliers  Increasing multicultural workforce *Global mindset is someone who has intellectual, psychological and social capital. Their intellectual capital is their understanding global business and the management of international operations. Their psychological capital is that they are self-assured, have a quest for adventure and passion for diversity. Their social capital is that they are diplomatic and have intercultural empathy in regards to understanding and speaking to different cultures. Christina Meyers BSB119 Global Business Page 2 Lecture 2: Introduction to IB Theories Theories of internationalisation **Drivers of Internationalisation – New Trade Theory  Economies of scale: Cost advantage associated with large scale production  Australia has a limited domestic market  If a firm sells overseas open up a larger market  By undertaking international business per unit costs of production will decrease as we have to produce more  significant profit  First mover advantages (economic and strategic advantage that accrue to early entrants into an industry) will develop economies of scale and create barriers to entry for other firms  competitive advantage  Example: As a matter of strategic trade policy the Australian Government funded research Cochlear bionic ear. This company gained a first mover advantage and today remain a world leader in the industry. They also assist in other areas of biotechnology and information technology through partnerships with universities and other major organisations.  Increasing Product Variety and Reducing Costs  A nation may specialise in producing a narrower range of products than it would in the absence of trade  Buy goods that it does not make from other countries  Increasing variety and lowering the costs of those goods. Nations benefit from trade even when they don‟t differ in resource endowments/ technology. A country may predominate in the export of a good because it was lucky enough to have one or more firms among the first to produce that good. Governments should consider strategic trade policies that nature and protect firms and industries when first mover advantages and economies of scale are important. Porter’s Diamond of Competitive Advantage Four attributes promote the creation of national competitive advantage: 1. Factor Endowments  Basic  Natural resources  Climate  Location  Advanced  Skilled labour  Infrastructure  Technological know-how 2. Demand Conditions  Demand for industry‟s product/service influence development of capabilities  Sophisticated and demanding customers pressure firms to be competitive Christina Meyers BSB119 Global Business Page 3 3. Relating and Supporting Industries  Strong domestic competition increase chances of competing against well- established international players 4. Firm Strategy and Rivalry  Different nations management ideologies can help them build national competitive advantage  Government policy can influence rivalry through:  Regulation  Antitrust laws  Impacting on the availability of highly educated works and advanced transportation infrastructure **Dunning’s Eclectic Theory Choose FDI when a firm possesses: 1. (O) Ownership advantages: firm owns a valuable asset (proprietary technology) that provides international competitive advantage (technology, trademark, political connections) that cannot be adequately protected by a licensing contract and needs tight control to maximise its market share and earnings 2. (L) Location advantages: Using resource endowments or assets tied to a particular foreign location and that a firm finds valuable to compliment, create and acquire its ownership advantages e.g silicon valley in US 3. (I) Internalisation advantages: keeping the production within the firm and controlling ownership advantage rather than outsourcing due to high transaction cost (e.g trade barriers) Models of internationalisation *U-Model (Internalisation) - Incremental Sequential Approach Christina Meyers BSB119 Global Business Page 4 Theory level Market knowledge leads to market commitment decisions and current market activities which leads to more market commitment Operational level Stages: 1. No regular export activities 2. Export via independent agent 3. Establishment of an overseas sales subsidiary 4. Overseas manufacturing Small firms tend to target psychically close countries (culturally and economically similar) e.g a firm in Australia should start exporting to NZ) with a well-defined niche market *I-Model – Rapid Internationalisation A firm becomes aware and interested in something, so they seek information and might make a trial sale to see if it is okay, if it doesn‟t work they will de-internationalise (pull out from the market) if it is successful then it make go in for adoption. Because of technology and the internet firms no longer have the luxury of going through the incremental sequential process (U Model). If they were to go through with the incremental sequential process of internationalisation other firm will target all the other major markets before them and create a barrier to entry. Born Global Firm: A firm that internationalises quickly. Christina Meyers BSB119 Global Business Page 5 BUSINESS ENVIRONMENTS Lecture 3: Socio-Economic Characteristics Economic Determinants  *Economic system  Market economy: Supply and demand determines the quantity in which goods and services are produced  Private ownership  Free market activity  MNEs need to assess the impact of large corporations, trade union and governments on the freedom of the market  Centrally planned economy: Allocation of resources, including determination of what goods and services should be produced, and in what quantity is planned by the government  Mixed economy: Certain sectors and left to private ownership and free market mechanisms while other sectors have significant government ownership and government planning e.g Japan, France  Transitional economy: Economies that are transforming their economic systems to marketed based systems e.g Europe  Extent of private ownership  Economic structure  Primary industry  Secondary industry  Service industry  Economic activity  Inflation  CPI: Measure of a change in the average price of a sample of consumer products  Unemployment  Balance of payments: National accounts that summaries payment to and receipts from foreigners  Foreign debt: Amount owing by private sector & government to foreigners  Exchange rate Selecting the target country  *Size of the economy  GNI: Total value of income accruing to a nation‟s residents  GDP: GNI – receipts of primary income  *Income levels  GNI per capita: Average income of a nation derived by dividing GNI by the total population  GDP per capita: does not factor cost of living difference  *Income distribution: Information on what proportion of the population receives what proportion of the total income  Personal consumption patterns Christina Meyers BSB119 Global Business Page 6  Tastes  Expenditure of particular good and services  Economic growth: Increase in the productive capacity and national output of a country measured by the rate of increase in GDP  *PPP Index: Adjustment in GNI per capita to reflect differences in the cost of living Non-Economic Determinants  Geography  Area  Climatic conditions  Topography  *Human Development Index: An assessment of the impact of life expectancy, literacy rate, PPP on the quality of human life by the UN Economic Development: Increasing capacity of an economy to improve and sustain the standard of living of the entire population Level of Economic Development 1. Less-Developed Countries  Inadequate infrastructure  Low literacy  Limited technology  Rural based – large agricultural sectors 2. Middle-Income Countries  Developing infrastructure  Improving education  Improving technology  Diversified economy – more employment in manufacturing than agriculture 3. Developed Countries  Developed infrastructure  High literacy  Modern technology  Industrialised – service economy Economic risk: Likelihood that economic mismanagement and macroeconomic instability will causes changes in a country‟s business environment that outcome of the business will be adversely affected *Market Potential Indicators  Market size  Population  Density  Distribution (age and gender)  Household characteristics  Market growth  Market intensity Christina Meyers BSB119 Global Business Page 7  Market Consumption Ratio  Commercial Infrastructure  Index of Economic freedom: How free countries are in doing trade (more free the easier and less costly to do business)  Political, economic and legal environments of a country  Attractiveness  Long-term risks v short-term benefits  Size, wealth, future economic growth  First mover advantages  “Star” future economies  Costs  Political payoffs  Economic sophistication  Legal framework Christina Meyers BSB119 Global Business Page 8 Lecture 4: Cultural Diversity Companies need to adapt to local culture. *Competitive advantage: Practical outcome of cultural understanding and competency. It results in a firm being readily accepted by locals; better market intelligence and understanding by political groups.  *Cost savings: Firms can save on costs through understanding the similarities and difference of culture by standardising, and gaining economies of scale  *Access to quality staff  *Marketing advantage: Ad produced & minor changes made to show around world  *Different problem solving approaches  *Effective management control: Honouring both cultures *Culture: A system of values and norms that are shared among a group of people and that when taken together constitute a design for living *Learned: Acquired by learning and experience; passed from generation to another *Shared: Members of groups and organisation share culture, it is not specific to an individual *Adaptive: Based on human capacity to change or adapt *Integrated: Change in one part brings about a change in other parts e.g technology, industrialisation, culture, education and social status *Elements of Culture 1. Material Culture: Economics and technology 2. Social structure: Basic social organisation of a society  Stratification: Class or caste system 3. Attitudes 4. Religion 5. Aesthetics: Arts, music, dance and symbolic meanings 6. Language: verbal and non-verbal - make sure you back translate *Comparing Cultures - Hall Low Context: Speaker‟s message is conveyed explicitly by the spoken words. It is about getting business done, not building relationships. High Context: Communicate as much by the context as the content Necessary to build long term relationship before undertaking business e.g guanxi, McDonalds in Moscow Ethnocentrism: Belief in the superiority of one‟s own ethnic group or culture When firms come from different cultural contexts, adjustments need to be made so that there is a mutual understanding. If trust is established it will reduce cost of doing business. Cross cultural literacy: Understanding of how cultural differences across and within nations can affect the way business is practices Christina Meyers BSB119 Global Business Page 9 Lecture 5: Trade and Investment Free trade: Absence of barriers to the free flow of goods and services between countries Instruments of trade policy 1. *Tariff: A tax levied by government on imports or exports  Specific tariff: Tariff levied as a fixed charge for each unit of good imported  Ad valorem: Tariff levied as a portion of the value (%) of the imported good  Who gains?  Government (revenue)  Domestic producers  Employees of protected industries  Who loses?  Consumers (pay higher prices)  Economy (inefficient)  Employees of protected industries don‟t develop new skills 2. Subsidies: Government financial assistance to a domestic producer e.g cash grants, low-interest loans, tax breaks, government equity participation in domestic firms and government order  Aimed at lowering costs to help:  Compete against cheaper imports  Gain export markets  Increase domestic employment  Achieve first-mover advantage in emerging industries 3. Non-trade barriers (NTBs): Less explicit trade barriers applying within the economy e.g preferential treatment, standards, labelling, buy-domestic campaigns 4. Import Quota: Direct restriction on quantity of goods that can be imported into a country 5. Voluntary Export Restraints (VER): Quota on a trade imposed by the exporting country, typically at the request of the importing country‟s government 6. Local content requirements: Requirement that some specific fraction of a good be produced domestically 7. Anti-dumping polices: Rules designed to punish foreign firms that engage in dumping and protect domestic producers from unfair foreign competition  Dumping: Selling goods in a foreign market below their cost of production or “fair market value” ` 8. Administrative regulations: Rules and procedures adopted by government that can be used to restrict imports or boost exports Motives for government intervention *Political 1. Protection of domestic jobs and industries 2. National security 3. Retaliation 4. Protection of consumer welfare 5. Maintain cultural distinctiveness Christina Meyers BSB119 Global Business Page 10 *Economic 1. Infant industry: The protection of an emerging industry until it becomes efficient enough to compete on the world market  Criticism  Fosters inefficiency and dependence  Rent seeking: Attempting to seek profit by manipulation of the economic/political environment rather than by profitable transactions 2. Strategic trade policy: Governments can assist firms by proving protection for industries to gain first-mover advantage, create barriers to entry, economies of scale and market power  Criticism  Beggar-thy-neighbour policy: A policy that yield economic benefit to the home country but only at he expense of making other countries incur economic losses There is a place for government intervention is cutting edge technologies, however not for protecting inefficient industries Christina Meyers BSB119 Global Business Page 11 Lecture 6: Political Political environment *Democracy: Political system in which government is by the people, exercised either directly or through elected representatives *Totalitarianism: Political system in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties MNCs will be more comfortable operating in a political environment similar to that of their home country Political risk: Likelihood that political forces will provoke drastic changes in a country‟s business environment and adversely affect the goals of business enterprises e.g war, insurrection, political violence, changes in government policies Inherent risk: Constantly present around the world Circumstantial risk: Arises out of particular events in different countries Policy impacts on IB and FDI Host Country Regulations  Investment restrictions  Entry and establishment  Ownership and control  Operational restrictions  Authorisation  Reporting processes  Investment incentives  Competitive bidding among nations  Australia‟s political structure is at a disadvantage as we have internal competitive bidding  Standards of treatment  National treatment  Transparency  Policies  Intellectual property law  Double taxation  Exchange control Causes of political risk  Economic objectives  Monetary and fiscal policies  Industrial and economic development polices  Socio-cultural differences  Changes of government Christina Meyers BSB119 Global Business Page 12  Transition to different political systems  Bilateral relations  Local vested interests Host nation responses There is a conflict between the desire to attract MNCs and the need for national independence. MNCs are seen to be able to contribute to economic development, by providing products or services not usually obtainable and can produce at larger values. Strategies to attract MNCs:  Free trade areas  Favourable tax treatment  Foreign exchange privileges Controls imposed on MNCs:  Limits of repatriation of profits, dividends and royalties  Ownership restrictions  Controls on raising capital  Curbs on transfer pricing  Price controls  Personnel restrictions  Labour and social controls *FDI and Host Country Benefits 1. Resource transfers: Capital, technology and management skills boost a country‟s intellectual capital and economic growth rate  Example: McDonald‟s in Moscow - $50 million capital investment, food processing plant was built, Russian manger had training in Canada 2. Employment effects: Brings job that would otherwise not be created. Increase spending on local suppliers results in spill-over benefits – jobs create more disposable income  demand for more services  Example: McDonald‟s in Moscow – 600 people were employed  However, effect may negative if the foreign company is buying existing ope
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