Topic 1.1 Introduction to International Business and Trade class.

These individuals will be interested in cheap transportation options in

  the future.
INTRO TO TOPIC
As the Preview IB Emerging Market Strategic Insight shows, emerging
International Business and Trade as a course provides students with a markets and emerging market multinationals will continue playing a critical
balanced perspective on business in a global environment, exploring role in the international business arena. Often, in today’s competitive world,
implications for multinational companies in developed and emerging markets. the only opportunity to grow a business and its profitability is when a
It emphasizes strategic decision making as the cornerstone of its approach company leaves its home country.
while focusing on emerging markets.
Established multinationals have traditionally looked to developed market
Topics like foreign exchange markets and global competition are contrasted economies for such opportunities. However, as the above examples show,
with emerging operations, like Chinese market intervention and Islamic emerging markets present significant opportunities. Nevertheless, with these
finance, to provide students with an understanding of successful business opportunities come the challenges of running a multinational operation in an
strategy. emerging market.
This course aims for its students to develop and implement these strategies
across cultures, and across economic, legal, and religious institutions in order To help you understand and meet the challenges of international business, the
to cope with competitive players in the global landscape.  With in-depth objective of this module is to show you how companies such as Shoprite
analyses and recommended strategies, this course equips students of succeed in the global marketplace and how they cope with the many
international business with the skills they need for success on the global complexities of running an international operation.
stage. 
Whether a business is large or small or located in whatever continent, the
Hence, the first Module will discuss the foundation concepts by knowing pressures to think global continue to grow. Consider just a few examples: if
what is International Business, the different theories of international you look at the clothes you wear, the cars you drive, or the computers that sit
investment and trade. Further, the participants that make the international on your desk, or keep track of your money in the bank, all have some
business will clearly be presented. At the end of the module, a topic on culture components produced or sold by companies engaged in international business.
and ethics in international business will be explored.  Why?

Module Objectives The major reason is the unrelenting pressures of globalization. Globalization
 Define international business. is the worldwide trend of the economies of the world becoming borderless
 Understand the nature of an MNC. and interlinked—companies are no longer limited by their domestic
 Understand the key forces that drive globalization and the current boundaries and may conduct any business activity anywhere in the world.
global economy. Globalization means that companies are more globalization the worldwide
 Know the basic types of economies that make up the world’s trend of economic integration across borders allowing businesses to expand
competitive landscape. beyond their domestic boundaries
 
 Appreciate the importance of sustainability in the new global
environment.
  Topic 1.2 Competing in the Global Marketplace

Topic 1 : Intro to International Business and Trade INTRO TO TOPIC

International Business Preview IB Emerging Market Strategic Insight Preview This second topic of Module 1 is entitled Competing in the Global
 Emerging Markets: The Wave of the Future The popular business Marketplace where students should be able to identify the key forces that
press abounds with stories of emerging markets and emerging market drive globalization and the current global economy. The discussion of the
multinationals. basic types of economies that make up the world’s competitive landscape will
 Emerging markets is an umbrella term referring to countries that have follow. Further, the role that low-cost countries and rapidly emerging
traditionally been seen as less developed but have markets that have economies play in today’s world will be discussed and last but not the
grown rapidly recently. Prominent examples of emerging markets least, the importance of sustainability in the new global environment shall be
include the BRIC countries or Brazil, Russia, India, and China. Despite lengthily be looked into.
an economic slowdown recently, emerging markets continue to present
tremendous potential.  
 Companies likely to compete anywhere. Many companies now sell
Within these emerging markets, new multinationals have emerged and they anywhere, source their raw materials or conduct research and development
are taking the business world by storm. Such emerging market multinationals (R&D) anywhere, and produce anywhere.
are rewriting the rules of the game. Consider the emerging market  Trade barriers are falling, and world trade among countries in goods and
multinationals such as Bimbo from Mexico, Tata from India, and Orascom services is growing faster than domestic production. Money is flowing more
from Egypt and how they are all rewriting the rules of business. These freely across national borders as companies seek the best rates for financing
emerging market multinationals shy away from long-term planning typical of anywhere in the world, and investors look for the best returns anywhere in the
multinationals based in more developed economies. world.
   The Internet crosses national boundaries with the click of a mouse,
Rather, they strive on chaos and have an insatiable hunger for global allowing even the smallest of businesses to go global immediately.
expansion. Such multinationals have undeniable advantages based on their Consequently, companies can no longer afford the luxury of assuming that
knowledge of extremely volatile local environments and their ability to deal success in their home market equates to long-term profitability—or even
with chaos. survival. Globalization is perhaps the major reason why you should study
international business. In today’s Internet-connected world, you may have
Many factors have impacted the development of such emerging market little choice.
multinationals. Emerging markets have typically faced markets for labor,
 With companies increasingly looking at global rather than domestic
capital, goods, and services that are imperfect or incomplete. Additionally,
markets, managers must become international in outlook and strategies. Your
emerging markets have also included governments that have been ready to
suppliers, your research and development, your manufacturing facilities, your
have heavy intervention.
strategic alliance partners, and your customers increasingly come from
beyond your national borders.
Some emerging markets also have unstable currencies. Despite such
challenges, emerging market multinationals have experienced success and  Foreign competition and doing business in foreign markets are daily facts
have achieved tremendous learning in the process. They have been able to of life for today’s managers. Successful managers must become international
imitate developed world multinationals in some areas such as strategy and in outlook. These are executives with the ability and motivation to meet and
organizational structure. beat the challenges of international business. The study of international
However, they have also developed their own innovative capabilities based on business helps prepare you to deal with this evolving global economy and to
the unique characteristics of the markets they operate in. Such local develop the skills necessary to succeed in business in a globalizing world.
challenges and chaotic environments have enabled emerging market  
multinationals to develop uniquely innovative products that can potentially
The Nature of International Business
help in developed markets.
A company engages in international business when it conducts any business
Consider, for instance, the case of the Tata Nano, the Indian giant’s effort to functions beyond its domestic borders. What kinds of business activities
develop a very low-cost car. Such advances are helping Tata develop products might make a company international? The most apparent activity, of course,
for low-income countries that will soon have more individuals in the middle is international sales. When a company produces in its own country and sells
in another, it engages in the simplest level of international activity. However, may allow the multinational to be able to start operations much faster, thereby
as you will see in much more detail later in the book, crossing national gaining in revenues. Consider the case of Walmart in Mexico and the bribery
borders opens up more international options than simply selling scandal where they paid local officials to change zoning to allow them to
internationally. build a store close to a major city. In fact, it has been claimed that Walmart
was involved in numerous bribery scandals around Mexico. Such bribery
scandals end up costing multinationals millions of dollars in fines. In fact, as
Globalization: A Dynamic Context for International you will see in Chapter 16, most countries are becoming stricter about
 globalization the worldwide trend of economic integration Business correcting ethical violations. Many governments have implemented more
across borders allowing businesses to expand beyond their domestic strict regulations and are also more likely to go after multinationals Involved
boundaries in ethical violations. While the above shows that developed world
 multinational company (MNC) any company that engages in business multinationals are not unlikely to engage in unethical behavior, such activities
functions beyond its domestic borders also affect emerging market multinationals. Consider the case of Alexkor, the
 international business when a company conducts any business functions South African stated-owned diamond miner. Despite mining in areas with
beyond its domestic borders huge reserves, Alexkor has more than often experienced losses than profits. A
 emerging market multinationals are influential multinationals from big problem is that many of the diamonds that are mined do not make it to the
emerging markets that are changing the traditional rules of competition income statement. Some have claimed that around half of the mined diamonds
and establishing new business models are stolen. Those involved in such activities sometimes use pigeons that are
smuggled in the mines and are then sent home with rough diamonds. Many of
Types of Economies in the Global Marketplace: the South African stateowned multinationals are plagued by losses resulting
The Arrived, the Coming, and the Struggling from corruption and incompetent management. Such behaviors end up costing
the South African economy significantly through frequent bailouts and lost
 developed economies - mature economies with substantial per capita GDPs
revenues because of corruption.
and international trade and investments
Source: D. Currell and T. D. Bradley, 2013, “Greased palms, giant
 developing economies - economies that have grown extensively over the
headaches,” Harvard Business Review, September, 21–23; The Economist,
past two decades 2015, “Commanding plights,” August 29, www.economist.com
 transition economies - countries in the process of changing from  
government-controlled economic systems to capitalistic systems SUMMARY
 least developed countries (LDCs) - the poorest nations, often plagued with  The last 2 sections has provided you with key background information that
unstable political regimes, high unemployment, and low supports the study of international management. Definition of international
management and the MNC were provided. Because we exist in a globalizing
 
world, considerable attention has been devoted to the forces that drive
Potential of Emerging Markets
globalization. These are key environmental issues that affect every MNC and
 Although growth in most emerging markets has either slowed down or
its managers. World trade and investments are growing rapidly but not always
even contracted, most experts agree that emerging markets will continue to
consistently, making all economies more linked and creating both
remain critical for multinationals worldwide. Reasons for such importance
opportunities and threats for both domestic and multinational companies. New
include: Although economic growth has slowed down, experts predict that
competitors, strong and motivated, are coming from emerging markets in
emerging markets will grow around 2.2 percent points faster than developed
Asia, the Americas, and Eastern Europe. Customers, products, and standards
economies in 2016. Most industries in such countries will continue growing.
are becoming more global. The increasing sophistication and lower cost of
 Despite the slowdown, economic growth in emerging markets accounted information technology fuel the development of global companies that can
for 68 percent of global growth. This growth will continue to remain strong in more easily manage worldwide operation. Multinational managers of the next
the future. generation will need skills not always considered necessary for domestic-only
 In terms of infrastructure, demand for investment will be around $25 managers. Perhaps the most encompassing characteristic is the global
trillion through 2025. This will also mean that multinationals in such areas mindset. Managers with a global mindset understand the rapidly changing
will have significant potential. business and economic environment. They can see the world as an integrated
 Incomes will continue rising substantially in emerging markets. For market, yet appreciate and understand the wide array of differences in the
example, 37 percent of the 60 million households will enter the middle class world cultures and social institutions. After reading this section, you should
in Brazil by 2020 compared to only 20 percent now. Middle-class consumers have the foundation for understanding the latest challenges and practices of
in India and China will represent $1.2 trillion in buying power. Additionally, international business. However, the world is dynamic and your learning will
around 300 million households will enter the consuming class. never be complete, as the challenges of international business will continue to
 Population of emerging markets is growing four times faster than the distant future. Additionally, you should get a good understanding of the
populations in developed economies. This also signals tremendous potential but challenges presented by emerging markets.
opportunities.
 By 2020, 6.4 billion people (out of 7.5 billion people worldwide) or 85
Topic 1.3 Strategy and the MNC
percent of the world’s population will be living in emerging markets.

INTRO TO TOPIC
Globalization Drivers The third topic in module 1 is entitled Strategy and the MNCs where
 Lowering the Barriers of National Borders: Making Trade and Cross- understanding the benefits MNCs can achieve using global integration or
border Investment Easier local adaptation will be explored in the beginning.  The conflicting pressures
 General Agreement on Tariffs and Trade (GATT) tariff negotiations of the global–local dilemma faced by international managers in MNCs will be
between several nations that reduced the average worldwide tariff on discussed and the content of the basic multinational strategies: transnational,
manufactured goods. international, multi domestic, and regional will be clearly defined.  Further, a
 Locate and Sell Anywhere to Anybody: It’s No Longer Only for multinational strategy by using the diagnostic questions that help MNCs to
Manufacturing but Services as Well cope with the global–local dilemma will be explored. It is expected that at the
end of the required reading, students should be able to understand the unique
 The Rise of Emerging Markets and Emerging Market Multinationals
challenges faced by emerging market MNCs when executing multinational
 Information Technology and the Internet: A Necessary Tool for Globally strategies and the  the unique challenges faced by MNCs when executing
Dispersed Companies multinational strategies in emerging markets.
 Increasing Global Products, Services, and Customers Topic Objectives
 Can I Buy it in Germany and Use it in India? The Need for Global  Understand the benefits MNCs can achieve using global integration or
Standards local adaptation.
   Understand the conflicting pressures of the global–local dilemma faced
Business Ethics and Environmental Sustainability by international managers in MNCs.
 Business Ethics refers to the approach used by companies when they face  Know the content of the basic multinational strategies: transnational,
ethical dilemmas international, multidomestic, and regional.
 Understand the unique challenges faced by MNCs when executing
 Despite the huge potential offered by emerging markets, they also pose
multinational strategies in emerging markets.
immense challenges. Established multinationals have found that they often
have to deal with local officials who require illegal payments to ‘resolve’ Topic 3: Strategy and the Multi National Companies
regulatory obstacles. Because of unclear regulations or other obscure laws, a  Beyond the traditional strategic questions facing all managers, the
multinational manager at the negotiating table may find that such issues have international manager, in both large and small companies, must confront the
to be resolved before business can proceed. Paying a local official such bribes
global–local dilemma. Markets, costs, governments, and the competition drive The first Module of INBUTRA course is all about the introduction
the choice of a solution. to the study of International Business and Trade. The first part is more on how
a company should prepare to compete in the global market place while the
 As the world becomes more globalized , we are seeing more companies second part is all about the different strategies that a multinational company
choosing transnational or international strategies to compete with low cost could make use of when competing in the international market
and high quality. However, cultural and other national differences remain, and
these will continue to provide opportunities to companies with more local or
regional orientations.
 As a form of differentiation—meeting unique customer needs—there are
benefits to favoring the more local responsiveness-oriented strategies.
 That is, the multi domestic or regional strategy tailors the product or
service to meet the unique needs of customers in a country or region. Because
you deliver unique products or services for each country, the pure multi
domestic strategy is the most costly.
 However, it allows an MNC the most latitude to handle differences in
culture, language, and political and legal systems. The regional strategy is less
costly as it is only a partial adaptation to local differences, allowing the use of
more similar products and lower-cost or higher-quality production within the
region.
 In this way, adaptation to regional differences is balanced against the
efficiencies of doing things similarly within the region.
 
 The goal for international and transnational strategists is to produce high-
quality products as efficiently as possible.
 Typically, MNCs using these strategies or a mix of the two try to have
global products with global marketing. Differing from the international
strategist, the MNC with a more transnational strategy uses worldwide
locations or platforms for its value-chain activities to maximize efficiency and
quality.
 That is, the more transnational strategies will look to do anything anywhere
if it makes good business sense. They are particularly attracted to offshoring
activities to the low-cost countries. The complexities of choosing
multinational
 The complexities of choosing multinational strategies in an everglobalizing
economy represent considerable challenges to international managers.
 To name only a few issues, for example, in choosing a multinational
strategy the international manager must consider the type of the product or
service (e.g. can it be global?), the government and political systems where
the MNC has units (e.g. how safe are the assets?), the financial risk of the
investment (e.g. what are the expected returns?), and the needs of the
company to control operations (e.g. can we really do it right 2,000 miles
away?). The IB Emerging Market Strategic Insight in this section have shown
you several examples of how practicing international managers in real
companies faced and responded to the challenges of formulating multinational
strategies.
 The complexities of choosing multinational strategies in an everglobalizing
economy represent considerable challenges to international managers. To
name only a few issues, for example, in choosing a multinational strategy the
international manager must consider the type of the product or service (e.g.
can it be global?), the government and political systems where the MNC has
units (e.g. how safe are the assets?), the financial risk of the investment (e.g.
what are the expected returns?), and the needs of the company to control
operations (e.g. can we really do it right 2,000 miles away?).
 MNCs execute multinational strategies in a dynamic global context related
to relationships among governments, patterns of trade and investments,
foreign exchange markets, and global capital markets.

The Value Chain and Competitive Advantage for the MNC

 value chain a way of identifying all the areas where a firm can create
value for customers
 outsourcing = contracting with other companies to perform certain
activities in the value chain offshoring outsourcing to a foreign company
or using foreign direct investment to move company operations to a
foreign country

Strategic choices for MNCs

 local responsiveness strategy = responding to differences in the markets
in all the countries in which a company operates
 global integration strategy = conducting business similarly throughout
the world, and locating company units wherever there is high quality
and low cost
 global–local dilemma = choice between a local responsiveness or global
approach to a multinational’s strategies
 

MODULE 1 SUMMARY