International Business

1. International Business Prof. dr. Pieter Klaas Jagersma

2. 1 Globalization: An Introduction

3. Headlines of international newspapers • “The Globalization of Markets .....” • “A Global Trade War on the Way?” • “Protectionist Pressures are Building .....” • “Ads that celebrate the Global Product .....” • “Multinationals Tackle Global Marketing .....” • “Globalization: The Debate Goes on .....” • “P&G’s Gamble on ‘Globalization’ .....” • “Going Global in Europe .....” • .....

4. Globalization - What’s in a name? • A step-by-step process of international business development whereby a firm becomes increasing- ly committed to and involved in international bu- siness operations through specific products in se- lected markets • Definition depending on the level to focus on

5. Globalization - What’s in a name? (2) • At a worldwide level ..... • globalization refers to the growing economic in- terdependence among countries as reflected in increasing cross-border flows of goods, services, capital and know-how

6. Globalization - What’s in a name? (3) • At the level of a specific country ..... • globalization refers to the extent of the interlinka- ges between a country’s economy and the rest of the world • Not all countries are equally integrated into the global economy

7. Globalization - What’s in a name? (4) • At the level of a specific industry ..... • globalization refers to the degree to which a com- pany’s competitive position within that industry in one country is interdependent with that in another country

8. Globalization - What’s in a name? (5) • At the level of a specific company ..... • globalization refers to the extent to which a com- pany has expanded its revenue and asset base ac- ross countries and engages in cross-border flows of capital, goods + know-how across subsidiaries

9. Conclusion • There is no universally accepted definition of glo- balization • Globalization is at the heart of the New World Economic Order • Globalization is here to stay

10. Globalization in perspective • According to the World Bank, the share in world output of multinational affiliates jumped from 4,5 per cent in 1970 to 15,5 per cent in 2000 • The share in manufacturing output of multinatio- nal affiliates was 18 per cent in 1992 (26 percent in 2000), up from 12 per cent in 1977 • Tariffs of developing countries are set to fall from 34 per cent between 1984 and 1987 to 14 per cent in 2003

11. Globalization in perspective (2) • Ratios of exports to global output were 9 per cent in 1913, 7 per cent in 1950, 11 per cent in 1973 and 16 per cent in the late 1990s • FDI flows grew at 12 percent a year between 1991 and 2002, while global exports grew at 6 per cent • In 2001, 30 per cent of total FDI went to develop- ing countries • In 2001, 300.000 foreign affiliates generated US $ 10,000 billion in global sales

12. 2 Global Industries

13. Global industries - What’s in a name? • Global industry = • an industry in which a competitive advantage is derived from the exploitation of scale/skills eco- nomies or comparative advantage across country boundaries within a centrally coordinated busi- ness system

14. Globalization of industries is the result of three major structural changes • Rise and equalization of incomes across the indus- trialized countries • Growth of homogenous demand patterns as reflec- ted in similarity of tastes and standards among (OECD) countries • Secular decline in trade barriers among (OECD) countries, even though selective sector-specific restrictions continue to exist

15. The convergence of income levels has resulted in similar consumption levels and demand patterns

16. The past decades have witnessed a secular decline in trade barriers • Barrier Trends Examples • Trade restrictions GATT negotiations Particularly effective among developed nations • Preferential pur- Gradual relaxation For example, telecommunications market • chasing policies and opening up of • government markets • Local content Continues to be im- Mexico and India have adopted more liberal • policies portant; though most foreign investment regulations • governments under- • stand the need for • companies to link their • local operations as part • of a global network • National security Continues to be in- Greater willingness on part of countries such as • policies voked as reason for France to accept participation of foreign firms • protection in high tech and defense projects

17. Examples of non-tariff (trade) barriers • Voluntary export restraints • Subsidies

18. Increasing interdependence among countries is evident • Exports are increasing in importance ..... • Exports as a percent of GDP (in EU, Japan and U.S.): • 15 percent (in 1965) > 31 percent (in 2002) • Source: OECD National Accounts

19. World business is and will continue to be characterized by ..... • Increasing interdependence among countries via trade and foreign direct investment (inter-industry trade/FDI) • Increasing interdependence and interpenetration within the same industry across countries (intra- industry trade/FDI)

20. FDI/Cross-border direct investment is a key feature of global competition in many industries • Automobiles • Aircraft • Telecommunications • Banking • Management Consultancy • Business Schools From Goods to Services

21. Foreign direct investments (FDI) nature changed: Typology • Global expansion vehicles 1970 1980 1990 1995 ‘00 • Greenfield investments 89% 66% 47% 35% 21% • M&A 4% 25% 32% 36% 37% • Cooperative agreements 7% 9% 21% 29% 42% • Number of international expansions (European firms) • Source: Jagersma (2001) Major increase in global M&A and (especially) global alliances

22. Japanese companies took the lead in globalizing industries • Share of world trade gained/lost 1970-1995 • Global/emerging industries US Japan BRD • Motor vehicles lost (2%) won (20) lost (5) • Machines, nonelectronic won (3) won (5) lost (10) • Aircraft won (10) won (5) lost (5) • Power machinery (nonelectric) lost (15) won (2) won (5) • Office machines lost (5) won (18) lost (2) • Automatic data processing lost (15) won (30) lost (5) • Machinery for specialized industries won (20) won (20) lost (17) • Telecommunications equipment won (5) won (8) lost (12) • Electrical power machinery won (2) won (11) lost (12)

23. Share of world trade gained/lost 1970-1995 (2) • Global/emerging industries US Japan BRD • Sound recorders, phonographs lost (4%) won (18) lost (14) • Woven textiles, man-made lost (2) won (15) lost (4) • Iron/steel lost (2) won (11) lost (2) • Plastic materials lost (1) won (9) won (3) • Civil engineering equipment won (2) won (12) lost (7) • Metalworking machines won (3) won (7) lost (2) • Transistors and valves lost (20) won (17) lost (8) • Electrical machinery won (2) won (8) lost (5) • Source: UN Yearbook on International Trade Statistics (1970-1995)

24. 3Global Strategy: An Introduction

25. Industries can be characterized on a spectrum • Sources of sustainable competitive advantage • Local >>> Emerging >>> Global • Derived from Derived from worldwide • country market management of business • system (integration) • - Scale/skills economies • - Country comparative • advantage (factor costs) • - Centralization of stra- • tegy and decentralization • of stages of business sys- • tem as economies and ef- • ficiency dictate

26. Characteristics of industries • LocalGlobal • Product market Wide variation in customer Homogenous buyer • preferences preferences, standards • worldwide • Economics Limited scale/high adap- Large scale/low adap- • tation costs tation costs • Competition Major competitors are lo- Major competitors are • cal competitors in each global even though • country they may be weak in a • particular country • World consists of ... Largely separate markets Linked markets

27. Characteristics of industries (2) • LocalGlobal • Role of global Competing globally Competing globally • strategy optional vital • KFS Success comes from res- Competitive advanta- • ponding to local conditions ge comes from global • centralization/coordi- • nation

28. Examples of local, emerging and global industries • Local Emerging Global • Cement Medical equipment Automobiles • Brewing Scientific instruments Computers • Soaps, detergents Optical goods Construction mach. • Food processing Plastic materials Agricultural mach. • Travel goods Measuring devices Pharmaceuticals • Retailing Specialized machinery Television • Housing Aircraft • HR consultancy Strategic consultancy • Retail banking Wholesale banking Investment banking • et cetera

29. 4Global Businessmodels

30. Globalization of business enhances need to change • Multi-national approach >> Global/integrated approach • (business units are stand- (business units are inter- • alone activities) linked activities) Economies of scale (output) Economies of scope (input) Economies of skills

31. In many industries, competing globally is imperative • Industries Global competitors Non-global casualties • Aircraft Boeing, Airbus Lockheed, MDD • Construction Caterpillar, Komatsu International Harvester • equipment • Autos Toyota, Ford, GM, VW British Leyland, DAF, Lada • Semiconduc- Intel, NEC, Fujitsu • tors • Computers IBM, HP, Dell, Apple ICL, Tulip • Pharma Merck, Novartis (almost Lots of small players • all large players) • Consumer Sony, Philips, Sharp, Grundig, AEG, RCA • electronics Matsushita, B&O

32. Global strategy requirements of competing glo- bally differs from country-centered competi- tion (in multi-market industries/segments) • Country-centered strategy Global strategy • (multi-market industries) (global markets/industries) • Portfolio of country subsidiaries Coordinated global system • Subsidiaries largely independent; evalua- Subsidiaries dependent on other • ted as profit centers on local results units; evaluated on basis of con- • (Deloitte&Touche) tribution to worldwide system • Competitive position based on in-country Competitiveness based both on • factors; subsidiaries may follow varied systemwide strengths and in- • strategies (KPMG) country factors; subsidiaries • have roles within system • Power and authority are weighted towards Power and authority are shared • country managers authority (PWC) among managers of business • units and country managers

33. 5Globalization: A Dynamic Process

34. Industries take three basic routes to globalization • The traditional path of becoming global when mature: evolution • Major discontinuities or innovation: revolution • “Born global”

35. Evolution paths1 = automobiles, color TV, construction equipment (evolution examples)2 = software, telecommunications (major discontinuities or innovation examples)3 = pharmaceuticals, large aircraft, robotics, large computers (born global examples) Source of competitive advantage Industries ..... Domestic Emerging/Multimarket Global 3 R&D Manufac- turing Marketing and distri- bution 1 2 3 1 Source: Jagersma (2000)

36. Main characteristic of market structure evolution during globalization: greater concentration (example: autoindustry) +/- 255 players +/- 25 players 1920 1995

37. ..... and also a decline in average profitability In percent 20 5 4,5 percent in 1995 1950 1995

38. 6Implications for Global Strategy

39. The essence of global strategy involves a firm’s deciding where and how to perform each business system element • Each element of the industry chain has its own globalization logic (or not!!) • Three kinds of design configurations are possible for each business system element • Centralized activities: ‘centralized’ strategy • Central coordination of geographically dispersed activities: ‘inter-linked’ strategy • Decentralized (differentiated) activities in each country: ‘stand-alone’ strategy

40. Globalization may take different approaches in each stage of the business system: Global R&D • Approach Rationale Example • One central location - Economies of scale Boeing aerospace labs • in R&D in Seattle • - Likely in country with • clear lead in techno- • logical infrastructure • Centrally coordinated, - Take advantage of unique Pharmaceutical compa- • multiple locations skills or strengths avai- nies • around the world lable in different country • locations • - Specialize labs by different • products/technologies

41. Globalization may take different approaches in each stage of the business system: Global R&D (2) • Approach Rationale Example • Same R&D in multiple - Draw on multiple scien- IBM (basic research • locations tific perspectives on same labs in U.S. and Europe) • problem • - Avoid risk of being tied • down to one approach

42. 7Generic Global Businessmodels

43. Global businessmodelsSource: Jagersma (2000) National Scope of optimum business system Global • Business profitability in • one country independent of • another • Profitability in one country • depends on operations in • other countries Stand- alone business systems Country Global niche Regional Transnat. Single regional/ worldwide business systems High Low Extent of local adaptation

44. 8Winners in Global Industries Play a Global Game

45. Many companies have to cope with these challenges ..... Actual strategy Country Regional Transnatio- nal Unilever GE Nestle IKEA IBM Philips [Siemens] Chrysler Xerox Ford Boeing Caterpillar Toyota Sony Daimler-Benz Olivetti Country Regional Transnational Required strategy

46. Nature of global strategy challenge depends on the extent of misfit Actual strategy Country Regional Transnational Requires readaptation of business system and or- ganization If not feasible, seek part- nerships Fundamental restructuring of business system Significant investment and organizational realignment Global strategy fit Difficult transition Global strategy fit Decentralize, permit local differentiation Global strategy fit Country Regional Transnational Required strategy

47. 9Take Aways

48. Take aways • World has entered a new era of global competition; funda- mental environmental forces (.....) will continue this deve- lopment • Winners in this/the next decade will be those with skills + fin. resources to play a global game; companies unable to attain global leadership must also adapt to minimize their disadvantages (.....) • There is no one pattern of global competition nor one type of global businessmodel (.....) • Globalization is here to stay: people want the best goods/ services, whatever their origin. Along with the right to vote they want the right to buy (.....)

49. International Success = Will + Skill Thrill