International Business: The New Realities

by

Cavusgil, Knight and Riesenberger

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Learning Objectives

1. Four types of participants in international business

2. Participants arranged by value-chain activity

3. Focal firms in international business

4. International entry strategies of focal firms

5. Distribution channel intermediaries in international business

6. Facilitators in international business

7. Governments in international business

3-2Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Four Types of Participants in International Business

1. Focal firm: Initiator of an international business transaction; e.g., MNEs and SMEs

2. Distribution channel intermediary: Specialist firm that provides distribution, logistics, and marketing services in the international value chain

3. Facilitator: Firm that provides special expertise in banking, the law, customs clearance, market research, or another field

4. Governments: Active in international business as suppliers, buyers, and regulators

3-3Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Typical Positions of Intermediaries and Facilitators in the International Value Chain

3-4Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Global Value Chain in the Automotive Industry

• Manufacture of the Chevrolet Malibu illustrates the national and geographic diversity of suppliers in a truly global value chain.

• Suppliers are headquartered in Britain, France, Germany, Japan, the U.S., and elsewhere. The components are typically manufactured in low-cost countries and shipped to the General Motors plant in Fairfax, Kansas, USA.

3-5Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Sample Suppliers of Components for the Chevrolet Malibu

3-6Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Dell’s International Value Chain

3-7Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

The Multinational Enterprise (MNE)

• A large organization with a network of production plants, marketing subsidiaries, and regional headquarters in numerous countries;e.g., Ford, Sony, Unilever, Citibank, McDonald’s, Amazon

• Historically the most important type of focal firm

• In China, Russia, and other countries that emphasize socialism, some MNEs are state owned.

3-8Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Multinational Enterprises, Ranked by Industry Sector Size

3-9Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Small and Medium-Sized Enterprise (SME) as a Focal Firm

• A relatively small player in its respective industry, usually defined as a firm with 500 or fewer employees.

• SMEs constitute the great majority of firms worldwide; they usually create the most new jobs.

• Characterized by limited resources, which often prevent internationalizing via FDI. Instead, SMEs usually internationalize via exporting.

• There are many more SMEs doing international business today than ever before.

3-10Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

The Born Global as a Focal Firm

• A relatively new breed of SME that undertakes early and substantial internationalization

• Usually niche players, typically exhibit a high degree of innovation, entrepreneurial orientation, and a “borderless” mindset

• Usually leverage information and communications technologies to internationalize early and operate effectively in world markets

• Make up the fastest-growing segment of exporters in most countries

3-11Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

The Born Global as a Focal Firm

3-12Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Foreign Market Entry Strategies of Focal Firms

• Foreign direct investment (FDI): The transfer of assets to another country or the acquisition of assets in that country

• International collaborative venture: Partners pool their resources and share the cost and risks of a new venture

• Exporting: Sale of products or services to customers located abroad, from a base in the home country or a third country

3-13Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Entry Strategies of Focal Firms (cont.)

• Importing or Sourcing: Focal firms procure numerous parts, components, and services from suppliers around the world

• Licensing: Granting the right to a foreign partner to use certain intellectual property in exchange for royalties

• Franchising: Granting the right to a foreign partner to use an entire business system in exchange for fees and royalties

3-14Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

A Classification of International Entry Strategies

3-15Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Distribution Channel Intermediary

• Specializes in physical distribution and marketing; connects the focal firm with the end user in the foreign market

• Assists focal firm by providing logistics services such as warehousing and customer support

• Especially critical to exporters that do not engage in FDI

• Based either in the foreign market or in the home country

3-16Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Intermediaries Based in the Foreign Market

Foreign Distributor

• Takes title to the exporter’s goods and performs marketing functions, such as sales, promotion, and after-sales service, on the exporter’s behalf

• Serves as the extension of the focal firm in the foreign market

• Arranges for local transportation and advises focal firm on how to function effectively in the local market

3-17Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Intermediaries Based in the Foreign Market (cont.)

Agent • Also known as a broker• Does not take title to the goods• Works on a commission basis to bring the buyer

and seller together

Manufacturer’s Representative • Works for the exporter under contract to represent

and sell its merchandise in designated territories • Acts as a contracted salesperson in a designated

territory3-18Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Contemporary Intermediaries

3-19Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Intermediaries Based in the Home Country

Trading Company• An intermediary that handles imports and exports of

various raw materials, parts, and finished products.• Large trading companies are typically high-volume,

low-margin resellers.• Many deal primarily in commodities such as grains,

minerals, coal, and metals (e.g., Cargill in the U.S.).• In Japan, trading companies are key players in

international trade; e.g., Mitsubishi, Marubeni, Mitsui, Sumitomo—all firms in Fortune’s Global 500.

3-20Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

World’s Largest Trading Companies

3-21Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Intermediaries Based in the Home Country (cont.)

Export Management Company (EMC)• Common in the U.S. and numerous other countries • Acts as an export agent on behalf of the focal firm;

finds export customers, negotiates terms of sale, and arranges for international shipping, typically for smaller exporters

• Most specialize in specific industries and geographic areas

3-22Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Online Intermediaries

• “Disintermediation”—bypassing traditional intermediaries—is made possible by the Internet.

• Examples include Amazon, Dell, and eBay.• Traditional retailers, such as Tesco and Wal-Mart,

have also established an online presence.• One negative outcome is

unscrupulous marketers that prey on unsuspecting customers with fake products (e.g., pharmaceuticals).

3-23Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Facilitators

• Assist the focal firm with specialized services required in international transactions.

• Examples include logistics service providers (e.g., DHL, FedEx), banks, international trade lawyers, freight forwarders, customs brokers, consultants, advertising agencies, market researchers, insurance companies, andtax accountants.

3-24Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Governments

• Governments exist at the local, provincial, national, and supranational levels to make and enforce laws and regulations and to provide essential economic security by devising fiscal and monetary policies.

• Central banks in each country issue currency and regulate national money supplies.

• Sovereign wealth funds are state-owned investment funds that undertake systematic, global investment activities to generate income or to achieve policy objectives.

3-25Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

3-26Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.