IB Ch # 01 by Alan Rugman

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Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Regional and global strategy
Chapter 1

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Regional and global strategy
• Objectives
• Introduction
• World business: a brief overview
• Today’s international environment
• Globalization and strategic management
• The study of international business
• Framework for this book

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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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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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World business: a brief overview

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• 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 world’s largest 500
MNEs.
(2) Foreign direct investment (FDI): 80% of all
FDI is made by the world’s largest 500 MNEs.
MNE activity

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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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Table 1.1 World Trade, 2005
Note: Data for European Union include intra-EU trade. Exports are calculated by including freight and insurance while imports do not include freight and
insurance. As a result data might not be consistent with other data in this book
Source: Adapted from International Monetary Fund, Direction of Trade Statistics Yearbook, 2006 (Washington, DC: IMF, 2006), pp. 2–5

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Table 1.2 Intra-regional trade in the triad, 1980–2005
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
Source: Authors’ calculations based on the IMF, Direction of Trade Statistics Yearbook, 2006 and 1985

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Table 1.3a Foreign direct investment in the United States, 2005
Note: Data are on a historical-cost basis. Numbers might not add up due to rounding
Sources: Authors’ calculations and US Department of Commerce, Survey of Current Business, June 2007, p. D67

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Table 1.3b Foreign direct investment by the United States, 2005
Note: Data are on a historical-cost basis. Numbers might not add up due to rounding
Sources: Authors’ calculations and US Department of Commerce, Survey of Current Business, June 2007, p. D65

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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’.

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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.
• The collective GDP of the EU is greater than that
of the US and Japan.
• The EU27 is the world’s largest importer and
exporter.

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The triad: Japan
• Japan is the largest economy in Asia.
• Japan is the 4th largest importer and 4th largest
exporter in the world.

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Today’s international environment

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• 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.
International business environment

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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.

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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.

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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 and excessively
powerful in political terms.
– MNEs produce homogeneous products for the
world market and through their efficient techniques
are able to dominate local markets everywhere.

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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.
Misconceptions about MNEs
(Continued)

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Globalization and strategic
management
Maintaining economic competitiveness

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Porter’s 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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From general to strategic emphasis
The study of international business

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Table 1.4 Comparative differences in the study of international business, 1950–2010

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Framework for this book

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Figure 1.1 Model for this book

IB Ch # 01 by Alan Rugman

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