Lecture 1

Regional and Global Strategy

APIIT

Lecture 1 - Regional and Global Strategy

Regional and Global Strategy

Objectives Introduction World business: a brief overview Todays international environment Globalization and strategic management The study of international business

APIIT

Lecture 1 - Regional and Global Strategy

Regional and Global Strategy

6:00PM 7:30PM: Lecture 7:30PM 8:00PM: Case Discussion and Analysis

APIIT

Lecture 1 - Regional and Global Strategy

Objectives
Define the terms international business and MNE. Discuss the two primary ways in which international business occurs: trade and FDI. Examine the impact of the triad on international trade and investment. Describe the current state of world economies and the role of government and trade regulations in the conduct of international business. Discuss the importance of technology and the role of SMEs in the international business arena. Examine how MNEs use triad/regional strategies to compete effectively in the international marketplace. Discuss the determinants of national competitive advantage.
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Introduction
International business: the study of transactions taking place across national borders for the purpose of satisfying the needs of individuals and organizations. Multinational enterprises (MNEs): a company headquartered in one country but having operations in other countries.

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Lecture 1 - Regional and Global Strategy

List of top 10 MNEs in 2011 based on Revenue (31st March 2011 based on Companies Annual Report)
Rank 1 2 3 4 5 6 7 8 9 10
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Company name Exxon Mobil Royal Dutch Shell Walmart BP Vitol Sinopec Chevron ConocoPhillips Samsung Group Toyota Motors

Industry Oil and Gas Oil and Gas Retailing Oil and Gas Commodities Oil and Gas Oil and Gas Oil and Gas Electronics Automative

Revenue Employees HQ US$ Billion 486 470 446 386 297 273 253 251 247 235 82,100 US 90,000 Britain/Netherland 2,150,000 US 97,600 Britain - Netherlands / Switzerland 400,500 China 61,189 US 29,800 US 275,000 South Korea 316,000 Japan
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Lecture 1 - Regional and Global Strategy

World business: a brief overview

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Lecture 1 - Regional and Global Strategy

MNE activity
Most MNE activity can be classified into two major categories:
(1) Trade (exports and imports): More than 50% of all trade is made by the worlds largest 500 MNEs. (2) Foreign direct investment (FDI): 80% of all FDI is made by the worlds largest 500 MNEs.

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Lecture 1 - Regional and Global Strategy

Trade and investment

Trade consists of exports and imports:
Exports: goods and services produced in one country and then sent to another country. Imports: goods and services produced in one country and bought in another country.

Foreign Investment: consists of companies investing funds to start or improve operations in another country.

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Lecture 1 - Regional and Global Strategy

What are the worlds largest economies? Largest trading economies? Largest FDI Economies?

List the Top 10

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List of Economies by GDP (Real)

lists of countries of the world sorted by their gross domestic product (GDP) (the value of all final goods and services produced within a state in a given year). The GDP dollar estimates given on this page are derived from purchasing power parity (PPP) calculations. Using a PPP basis is arguably more useful when comparing generalized differences in total economic output between countries because PPP takes into account the relative costs and the inflation rates of the countries, rather than using just exchange rates which may distort the real differences in income.

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List of Economies by Exports

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List of Economies by Imports

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List of Economies by FDI Abroad

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List of Economies by FDI Received

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The triad
Most global transactions take place within and between three key regions: the United States, the European Union and Japan; these are referred to as: the triad (all developed economies, or early industrialized countries).
Why so?

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Table 1.2

Intra-regional trade in the triad, 19802005

Note: Asia data were calculated using information for exports from Japan, China, India, Indonesia, South Korea, Malaysia, Singapore, Thailand and Australia to the Asian region and the world. Data for EU are for intra-EU exports in 2000 and 2005 and intra-EEC Exports in 1980 European Economic Community (EEC): the name of the precursor of the European Community (EC) before it became the European Union (EU) in 1993.
Source: Authors calculations based on the IMF, Direction of Trade Statistics Yearbook, 2006 and 1985

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The triad: the United States (US)

The US has the largest economy in the world with a GDP of over $10 trillion. The US is part of the North American Free Trade Agreement (NAFTA) with Canada and Mexico. The US economy is significantly larger than that of its two trading partners and is therefore a triad member on its own.

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The triad: the European Union (EU)

The EU (or EU27) is composed of the countries in the EU15 (Austria, Belgium, Denmark, Finland, Germany, Greece, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the UK) and twelve new, mainly Central European, countries that joined in 2004 and 2007 (Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Slovenia, and Slovakia as well as Cyprus and Malta) and in 2007 (Bulgaria and Romania). The collective GDP of the EU is greater than that of the US and Japan. The EU27 is the worlds largest importer and exporter.
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The triad: the European Union (EU)

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The triad: Japan

Japan is second largest economy in Asia, following China. Japan is the largest developed (Western) economy in Asia. Japan is the 4th largest importer and 4th largest exporter in the world, following China, US, and Germany.

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Todays international environment

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International business environment

The international business environment has changed rapidly in recent years as a result of:
an overall slowdown of triad economies; increased trade liberalization through trade agreements; improvements in technology; the emergence of SMEs.

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Slowdown of triad economies

In the late 1990s and early 2000s, the United States, the EU and Japan all experienced a reduction in economic activity, which in turn decreased international business activity.
Why so?

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International trade regulation

An important international business trend has been the emergence of regional and global trade and investment liberalization and international regulation.
The World Trade Organization (WTO) General Agreement on Tariffs and Trade (GATT)

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The world trade organization

Established on January 1, 1995. An international organization that deals with rules of trade among member countries. Enforces the provisions of the General Agreement on Tariffs and Trade (GATT). Acts as a dispute-settlement mechanism.

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The general agreement on tariffs and trade (GATT)

Established in 1947 to liberalize trade and to negotiate trade concessions among member countries. Today, the WTO is enforcing the provisions of the GATT.

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Improved technology
More powerful and affordable technology has promoted fast easy worldwide communication and improved production capabilities enabling organizations to operate more effectively in the international marketplace.
So More IB or Less?

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Small and medium-sized enterprises (SMEs)

The definition of SMEs varies according to the nation. In general, it refers to companies with between 11 and 500 employees with sales of less than $5 million.

MNEs often purchase from SMEs. This is because their specialized workforces, innovation and technology allows SMEs to provide goods and services more efficiently than if the MNE were to source these internally.
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Globalization and strategic management

Regional triad strategies

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Misconceptions about MNEs

Common misconceptions about MNEs:
MNEs have far-flung operations or earn most of their revenues overseas. MNEs are globally monolithic (uniform) and excessively powerful in political terms.
KFCs food are localized BP, News Corp, etc.

MNEs produce homogeneous products for the world market and through their efficient techniques are able to dominate local markets everywhere.
Any good examples of companies that perform very well globally, but poorly locally?
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Misconceptions about MNEs (Continued)

In fact,
MNEs earn most of their revenues in their home regions. The largest 500 MNEs are not spread around the world but clustered around the triad. These MNEs engage not in global competition but in triad/regional competition; this rivalry effectively eliminates enduring political advantage. MNEs adapt their products for the local market.

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Fortune 500 HQs

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Fortune500 : 2011 Top 10 Largest MNEs

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Globalization and strategic management

Maintaining economic competitiveness

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Porters determinants of national competitive advantage

Why are some firms able to innovate consistently while others are not?
Factor conditions Demand conditions Related and supporting industries Firm strategy, structure, and rivalry.

Each of these determinants depends on the others as a system.

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Porters determinants of national competitive advantage (Contd) Factor conditions

Land, Labor and Capital
Ex. If a country has a large, relatively uneducated work-force, it will export goods that are highly labour-intensive. Ex. Denmark has two hospitals that specialized in studying diabetes; Denmark also is the world leader in the export of insulin.

Ex. Netherlands, the worlds leading exporter of flowers, has created a research institute in the cultivation, packaging, and shipping of flowers.

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Porters determinants of national competitive advantage (Contd) Demand conditions

Porter states that a nations competitive advantage is strengthened if there is strong local demand for its goods and services. This demand provides a number of benefits. First, it helps the seller understand what buyers want. Second, if changes become necessary, such as customer desires for a product that is smaller, lighter, or more fuel efficient, the local seller has early warning and can adjust or innovate for the market before more distant competitors can respond. In fact, the more sophisticated the local buyers, the greater the advantage to the local seller. For example, one reason that Japanese firms pioneered small, quiet air-conditioning units is that many Japanese live in small houses and apartments where loud noise can be a problem. In the United States, consumers helped to develop a highly efficient fast-food industry, and as the desire for this cuisine spread worldwide, US franchisors like McDonalds and Pizza Hut have been able to tap international demand for their products.
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Porters determinants of national competitive advantage (Contd) Related and supporting industries
When suppliers are located near the producer, these firms often provide lower-cost inputs that are not available to the producers distant competitors. In addition, suppliers typically know what is happening in the industry environment and are in a position to both forecast and react to these changes. By sharing this information with the producer, they help the producer maintain its competitive position. The Italian shoe industry is an excellent example. Shoe producers interact on a regular basis with leather manufacturers, exchanging information that is useful to each in remaining competitive. This interaction is mutually beneficial to both parties.

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Porters determinants of national competitive advantage (Contd) Firm strategy, structure, and rivalry.
Porters fourth broad determinant of national advantage is the context in which the firms are created, organized, and managed, as well as the nature of domestic rivalry. No one managerial system is universally appropriate. Nations tend to do well in industries where the management practices favored by the national environment are suited to their industries sources of competitive advantage. In Italy, for example, successful firms typically are small or medium sized; operate in fragmented industries such as lighting, furniture, footwear, and packaging machines; are managed like extended families; and employ a focus strategy geared toward meeting the needs of small market niches

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The study of international business

From general to strategic emphasis

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Table 1.4
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Comparative differences in the study of international business, 19502010

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Case Discussion TATA MOTORS

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Objectives
Define the terms international business and MNE. Discuss the two primary ways in which international business occurs: trade and FDI. Examine the impact of the triad on international trade and investment. Describe the current state of world economies and the role of government and trade regulations in the conduct of international business. Discuss the importance of technology and the role of SMEs in the international business arena. Examine how MNEs use triad/regional strategies to compete effectively in the international marketplace. Discuss the determinants of national competitive advantage.
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A few good magazines, news media, and journals relating to IB

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