international business

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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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Study case

Coca-Cola

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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, 2005Note: 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 bookSource: 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, 1980–2005Note: 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 1980Source: 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, 2005Note: Data are on a historical-cost basis. Numbers might not add up due to roundingSources: 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, 2005Note: Data are on a historical-cost basis. Numbers might not add up due to roundingSources: Authors’ calculations and US Department of Commerce, Survey of Current Business, June 2007, p. D65

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Q1: Why did Coca-Cola engage in FDI in Europe?

• Coke make these investments to improve its market position. This is being done in three ways. First, the construction of the new bottling plants is helping the company produce a low-cost product. Second, marketing expenditures are helping the firm gain the product recognition needed for growth. Third, FDI in facilities closer to the market are reducing delivery time and eliminating associated expenses.

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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-sizedenterprises (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 ofnational 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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Q2: How did Coke improve its factor conditions in Europe?

• Factor conditions include land, labor and capital. The company is using land and capital to built new bottling plants that are more efficient and better suited to meet market demand. It is working to improve the effectiveness of the labour force by getting the personnel to become more market oriented and to sell the product more vigorously throughout Europe.

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Q3: How is local rivalry helping to improve Coke’s competitive advantage?

• Coke faces strong comeptition in Europe. European do not drink as much Coke as do Americans; as a result, Coke has had to modify its strategy to address this market. This includes the building of new bottling plants that can help drive down costs and make the company more price-competitive, and new marketing campaigns that are designed to draw customers away from competing products. Coke is also working to develop non-carbonated drinks to address local tastes. Finally, competition from locals who better understand their market is forcing Coke “to think local, act local”.

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Q4: Is the Coca- Cola Company a multinational enterprise? Is it global? Why?

• Coke is an MNE. The firm conducts products and distribution activities in nations other than its home country. And in terms of strategy and management orientation, Coca-Cola does three things that illustrate its multinational nature. First, the company modifies its operations to meet local needs. The firm markets on a country-by-country basis. Second, Coke has international partners who help to run the operations and do not report directly to the company on day-to-day matters. Third, the MNE relies heavily on teamwork by all involved parties and, to a large degree, serves more as a coordinator and cheerleader for the product than as an on-site manager.

• Coke is a global company. Together, the US and Canada account for just a third of its revenues. European and Asian operations are just as important for the company. No one region absolutely dominates. Unlike MNEs that depend predominantly on their home market, Coke has a global view and a global strategy.

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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

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