Leading Exporting and Importing Countries, continued
Top 25 Companies by Foreign Asset Ownership
Foreign Direct Investment Developed countries get the bulk of FDI (69%) while developing countries get around 30%. Least developed countries get minimal FDI. Implications for managers—significant opportunities around the world. Multinational managers should look at risk rating of countries.
The Internet and Information Technology Electronic Communication — E-mail, World Wide Web, etc. Allows multinationals to communicate with company locations throughout the world. Multinationals can also monitor worldwide operations. Information technology is spurring a borderless financial market.
The Rise of Global Products and Global Customers The needs of customers for many products and services are growing more similar, e.g., McDonald’s, Boeing, Toyota. Global customers search the world for their supplies without regard for national boundaries.
Privatization Sale of government-owned businesses to private investors, usually through stock or direct sale to other companies. Two types of privatization contribute to the global economy — the developed world and the developing world.
Privatization—Types The Developed Countries Use privatization to make formerly government-controlled enterprises more competitive in the global economy. The Developing Countries Use privatization to jump-start their economies or to speed the transition from a communist to a capitalist system.
New Competitors Free market reforms are creating a potential group of new competitors. Korean, Russian, Taiwanese, and Mexican companies are all emerging. Chinese companies are also on the move.
Top 25 Emerging Market Companies
New Competitors are Emerging Global trade has two important effects in developing new competitors: When developing countries are used as low-wage platforms for high-tech assembly, multinationals facilitate the transfer of technology. Aggressive multinationals are also expanding beyond their own borders.
The Rise of Global Standards Companies can make one or only a few versions of product for the world market. This is cheaper than making different versions for different countries. Drive to develop common standards to save money.
Global Standards Consistency in quality also an important requirement of doing business in many countries. International organization for standardization (ISO) in Geneva, Switzerland Developed a set of technical standards (ISO 9001:2000 series).
Internationalization Internationalization is the process by which Firms increase their awareness of the influence of international activities on their future Establish and conduct transactions with firms from other countries.
5 reasons global sourcing programs To focus on core competencies To reduce and/or variablize costs To gain expertise that is not currently in house To increase quality, efficiency, and speed of delivery To be able to scale operations effectively Source: ITESA
Flat World and NIN Berlin Wall Windows Netscape Browser Workflow Flat World NIN
Flat World and NIN Berlin Wall Windows Netscape Browser Workflow
Flat World NIN
Flat World and NIN Uploading Outsourcing Offshoring Supply-chaining In-sourcing In-forming Steroids Flat World NIN
Flat World and NIN Uploading Outsourcing Offshoring Supply-chaining In-sourcing In-forming Steroids Flat World NIN
The world is flat . . . (Friedman)
Three converging developments
A global, Web-enabled playing field that allows multiple forms of collaboration
Gradual adaptation of organizations through horizontal collaboration in the value creation process extends this platform to different countries
3 billion people join the party - opening of economies like China, India, Russia, and in Eastern Europe, Latin America, and Central Asia to the world economy
Example of how triple convergence works A global, Web-enabled playing field that allows multiple forms of collaboration is in place A company installs an effective supply chain that allows it to source products from a country, e.g. India, Bangladesh, China, Ireland, etc. A factory worker in China is able to benefit from global trade because his or her country has allowed information and products to flow “freely”
New “Arrivals” Population data Population data We are only seeing the tip of the iceberg. Not everyone has access yet Microsoft: in China, 1 in a million can mean a total of 1,300,000 Bangalore: “we are hungry for success” Its dominated by, but not all India Map of IT businesses
Why do Firms Internationalize? opportunities for growth market diversification higaher margins and profits Gain new ideas about products, services, and business methods Better serve key customers that have relocated abroad Be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products
Why do Firms Internationalize? Gain access to lower-cost or better-value factors of production Develop economies of scale in sourcing, production, marketing, and R&D Confront international competitors more effectively or thwart the growth of competition in the home market Invest in a potentially rewarding relationship with a foreign partner
STEP Political Social Economic Technological
Dimensions of Internalization Internationalization has both inward-looking and outward-looking dimensions. The outward-looking perspective incorporates an awareness of the nature of competition in foreign markets
Dimensions of Internalization (cont.) Includes the following modes of activities: Exporting. Acting as licensor to a foreign company. Establishing joint ventures outside the home country with foreign companies. Establishing or acquiring wholly owned businesses outside the home country.
Dimensions of Internalization (cont.) Similar to the Sequential Approach theory of internationalization: As firms build confidence, experience and success: Partially Owned Wholly Owned (3) Acquisition Existing Business (1) Capital Participation New Business (2) Joint Venture (4) Greenfield
Dimensions of Internalization (cont.) Not all firms do or can follow the sequential process of internationalization: Dependent upon industrial and environmental conditions Need to coordinate operations in many countries and many value chain activities
Dimensions of Internalization (cont.)
Internationalization affects firms in equally important ways from an inward perspective.
The related modes of activity include:
Acting as licensee from a foreign company.
Establishing joint ventures (JVs) inside the home country with foreign companies.
Managing as the wholly owned subsidiary of a foreign firm
Dimensions of Internalization (cont.)
Many firms have an appreciation of the global environment but do not seek out international opportunities in countries that differ greatly
Questions to explore:
What products/services can be “global”?
How can a firm know if it has a globally competitive product?
How can the firm successfully take a product global?
Implications for Your Project Upstream Internationalisation (Supply chain management) Location of key suppliers Relationship with key suppliers Changes in number and frequency of changes Supply strategies , e.g. vertical integration Downstream Internationalisation (Export management) Goals, relationships, strategies, organisational development
Degrees of Internationalisation Degree of commitment/level of involvement (structure) Degree of change within the firm (process)
International Product Life Cycle Basic Assumptions The relative weight of changes in factors of production at various stages of a product’s life cycle Changes in a product’s degree of market attractiveness Implications for Internationalisation Extension of the life cycle of products Reduction in unit costs of production Other useful concepts Product vs. Market lag Client-followers vs. Market searchers
The Network Approach to Internationalisation Firms within an industrial market are inter-dependent They share resources Their relationships are both stable and changing They are mutually vulnerable Markets are networks of relationships
Some Characteristics of a Network Intensity Power sharing Reciprocity Cohesion, through Domain consensus Positive evaluation Work co-ordination
FACTOR ENDOWMENTS (HECKSCHER – OHLIN) Introduces concept of ‘factors of production’. A country will have a comparative advantage in producing goods which make intensive use of factors of production which it has in abundance A country exportsproducts which use intensively its relatively abundant factors and imports products which use intensively its relatively scarce factors Leontief paradox
Industrial Clusters A concentration of suppliers and supporting firms from the same industry located within the same geographic area Examples include: the Silicon Valley, fashion cluster in northern Italy, pharma cluster in Switzerland, footwear industry in Pusan, South Korea, and the IT industry in Bangalore, India Industrial clusters can serve as an export platform for individual nations
National Industrial Policy Proactive economic development plan implemented by the public sector to nurture or support promising industry sectors with potential for regional or global dominance. Public sector initiatives can include: Tax incentives Monetary and fiscal policies Rigorous educational systems Investment in national infrastructure Strong legal and regulatory systems
National Industrial Policy:Ireland as an Example Beginning in the 1980s, the Irish government implemented a series of pro-business policies to build strong economic sectors. The “Irish Miracle” resulted from: Fiscal, monetary, and tax consolidation Partnership with the industry and unions Emphasis on high-value adding industries such as pharma, biotechnology, and IT Membership in the European Union; subsidies and investment received from the EU Investment in education
FDI Based Explanations: Dunning’s Eclectic Paradigm Three conditions determine whether or not a company will internalize via FDI: Ownership-specific advantages – knowledge, skills, capabilities, relationships, or physical assets that form the basis for the firm’s competitive advantage Location-specific advantages – advantages associated with the country in which the MNE is invested, including natural resources, skilled or low cost labor, and inexpensive capital Internalization advantages – control derived from internalizing foreign-based manufacturing, distribution, or other value chain activities
The background - Uppsala The firm is assumed to strive for growth and long term profit The firm is assumed to avoid uncertainty and keep risk taking at a low level The behavioral theory of the firm bounded rationality – perfect decisons are infeasable limited search satisficing behavior - meet criteria for adequacy, rather than to identify an optimal solution conflicting goals, Incremental adjustments to changing conditions of the firm and its environment Dynamic model (present state important for future changes and subsequent states)
State Aspects Market knowledge Information stored and retrievable in minds of individuals, computer memories or in written form Objective or experiential – latter most crusial Market commitment Amount and specificity of resources committed to a market (experiential knowledge may be one type)
Change Aspects Commitment decisions Response to perceived probalems/opportunities High perceived uncertainty leads to low commitment Increased (experiential) makret knowledge leads to lower preceived market uncertainty Small steps unless very large resources Current business activities Prime source of market experience
Johanson & Vahlne – 1990 (1) Stages model is one possible manifestation of the State and change aspects model Internationally experienced firms may allocate resources on the basis of real market conditions rather than in response to the unknown Validity of model mainly in early stages (low experiential knowledge and high uncertainty) World more internationalized and homogeneous Psychic distance smaller and market knowledge less country specific
Johanson &a Vahlne – 1990 (2) Service firms may internationalize in a different manner Internationalization processes should be related to processes in the environment (market, network, industry, technology, etc.) Behavioral model could be supplemented by economic models Strategic thinking should supplement emergent development, chance, and necessity
The stage model
Moving Forward Friedman’s view of a “flat world” “Flatteners” or developments that helped create this flat world Summarize these flatteners into his notion of a “triple convergence”
Flat World Playing field has been flattened traditional advantages accruing to one country or a large multinational are being challenged Coefficient of globalization Completion for global knowledge work Intellectual work, intellectual capital, can be delivered, distributed, produced, and put back together again . . . with relative freedom in the way we do work
What is the significance of all this?
Significance of Flat World Level playing field Traditional, comparative advantages held by those with access to information and/or technology can now be challenged Individuals from non-traditional backgrounds can now engage in economic activity, at times in ways not seen before
Flattenersfirst three are platforms contributing to collaboration
Flatteners: first three are platforms contributing to collaboration 11/9: the fall of the Berlin Wall opening Windows Fall of the “Wall” between East and West Berlin Political systems that were once closed opened up Windows 8/9: Netscape goes public Emergence of an internet browser Work flow software: Development of software which when installed in different computers and in different places allows them to work with each other
11/9 as a platform for collaboration 11/9: the fall of the Berlin Wall which separated East and West Berlin and Germany The fall of the “wall” resulted in the eventual collapse of countries that were part of the Council for Mutual Economic Assistance or COMECON, sometimes referred to as the “Eastern bloc”, or the Soviet empire Included in this “bloc” were countries like the Czech Republic, Bulgaria, Romania, East Germany, Poland, etc.
Friedman’s claim this event tipped balance of power across the world towards more democratic, free-market oriented governments
11/9 as a platform for collaboration (Continued) Centrally planned countries “opened up” In 1991, India abolished trade controls China accelerated reforms (although some of china’s economic reforms started in the 70s) Global exchange of digital information now possible as political restrictions eased up Huge personal empowerment
8/9 as a platform for collaboration 8/9: Netscape goes public The initial browser was Mosaic which was designed to allow researchers/scientists in remote locations to access each other’s work Mosaic was transformed into the first browser to be made available to the public (for free) Coupled with introduction of Windows 95, including GUI capability, these made accessing the internet much easier Early access to the internet were text based
8/9 as a platform for collaboration (Continued) Browsers as gateway to Internet From internal systems to systems of systems Dot com bubble allowed massive investments in the internet highway; by the time the bubble burst, an initial physical infrastructure – fiber optic cables, switches, etc. – was in place From resistance to email and cell phones (early 90s) to emergence of terms like B2B and B2C.
Work-flow software as a platform for collaboration Work flow software: software that allows computers and in different places to communicate and work with each other using different modes, e.g. audio, video, etc. Example: Wild Brain produces cartoons in SF Recording sessions Design and direction Writers Animation All in different locations using Virtual Private Network (VPN)
Work-flow software as a platform for collaboration (Continued) Example 2: Pay Pal Emergence of protocols and standards to facilitate communication among systems
Flatteners: the next seven are new forms of collaboration
Flatteners: the next seven are new forms of collaboration Uploading Outsourcing Offshoring Supply-chaining In-sourcing In-forming Steroids
Flattener 4: Uploading Power or capability of individuals to send up, out, and around their own products and ideas Apache – a web server that allow web browsers (in different computers) to interact with different web servers. Web servers allow a user to use his or her home or office to host a web site.
Flattener 4: Uploading (Continued) Open source communities “community rules” Examples: Linux operating system - offers a family of operating systems; can be adapted to run on the smallest desk top computer, laptop, palm pilot, etc. Firefox (Mozilla) Blogging, Wikis, etc.
Flattener 5: Outsourcing India as an example of how outsourcing began Educational infrastructure in India 7 Indian Institute of Technology 6 Institute of Management As a result, Indian nationals would go to the US or developed countries to find work Dot-com boom created “physical highway” to allow for India to get “connected” Reform of telecommunications system in India
Flattener 5: Outsourcing (Continued) US companies start looking for opportunities to utilize labor pool in India Late in the 1990s, the Y2K issue emerged Indian “expats” return to India after “dot.com bubble” burst Friedman sees the massive amount of programming to prevent a “Y2K” disaster and return of expats catalysts India’s emergence as an outsourcing destination
Flattener 6: Offshoring Offshoring: move a strategic process or portion of a company’s value chain to a foreign location Distinction Outsourcing: have another company do a specific, but limited function, e.g. accounting Offshoring: move production or an important process offshore
Flattener 6: Offshoring (Continued) China as an example of the emergence of offshoring 1977: Deng Xiaoping starts economic reforms in China Mid 1980s: applies for membership in WTO Finally accepted into WTO mid 1990s Watershed moment in the sense that as a member of WTO, China has to play by international rules
Flattener 6: Offshoring (Continued) Example: ASIMCO From efforts to find “new china” managers to manage their business to investing in the US US operation takes care of finishing, also allows company to keep abreast with technology Film: China Brands Friedman does mention possible limits to growth in China, including need for further reforms
Work-types companies avoid offshoring Relationship-oriented work Process where repeatable process map cannot be created Roles with complex industry structure and/or long product learning curves Success criteria are not well defined or measurable Strategic aspect to the business High levels of sensitive intellectual property are shared across wide groups of people
Work-types companies push offshoring High transaction volume High repeatability Low domain knowledge needed Low mission criticality Few touch points Low complexity Low training efforts Non-strategic Well defined process and metrics Easily transmitted over electronic wires Outcomes can be easily managed
India Advantages Low cost Native English Early market entrance Governmental software export strategy since 1972 Early adoption to quality standards Strong educational programs Government incentives Technology park development Tax advantages and tax breaks Low import duties
India Disadvantages Geo-political risk with Pakistan Electrical Power issues 24 hour travel Time zone Costly Turnover Salaries rising 20% annually for skilled workers Mid-manager staffing difficulties Cultural differences
Brazil Advantages Low cost Time Zone and Proximity Early adoption to quality standards Strong educational programs Multilingual Support (Spanish and Portuguese support) Government incentives Technology park development (but need more) Tax advantages and tax breaks
Brazil Disadvantages Corruption Lack of Qualified People Delays Infrastructure IP Problems English Brain Drain Higher cost than India and China Poor infrastructure especially off coast High sunk cost Costly turnover
China Advantages Scale Labor Speed Low cost Strong educational programs and joint university programs Government incentives Technology park development Tax advantages and tax breaks
China Disadvantages Focus on Asia English Cultural differences and inward thinking Uncertain governmental actions Communist effect on property laws Communist bureaucracy Intellectual property theft is rampant Data Privacy Poor infrastructure especially off coast Manufacturing focus Poor customer service Need for local representation/local partner Indian offshore companies are having problems with offloading their own work to China
Flattener 7: Supply Chaining Wal-Mart as an example of a company that pursues supply chain management aggressively Coefficient of Globalization Learning to sell new products: sushi
Flattener 8: Insourcing World Synchronized: Supply Manager Trust through systemes Toshiba Repairs Shoes.com UPS
Flattener 9: In-forming In-forming: capability to build your own supply chain . . . of information, knowledge, entertainment
Flattener 10: Steroids Computing capability has increased in terms of computational, storage, and input/output capacity Instant messaging and file sharing VOIP Video conferencing Computer graphics Wireless communication