University of Cagliari, Faculty of Economics, a.a. 2012-13

1. Business Strategy and Policy A course within the II level degree in Managerial Economics year II, semester I, 6 credits Lecturer: Dr Alberto Asquer aasquer@unica.it Phone: 070 6753399 University of Cagliari, Faculty of Economics, a.a. 2012-13

2. Lecture 7 Internationalisation Strategy Business Strategy and Policy

3. 1. What is internationalisation? 2. Where do firms go international? The “global shift” 3. How do firms go international? 4. What issues do international firms face? 5. What kind of institutions do support internationalisation? - - - - - - - - - - - - - 6. Summary Introduction

4. Internationalisation is the process through which a firm expands its business outside the national (domestic) market Firms go international: to enter new output markets to reduce costs and enhance competitiveness to exploit their own core competences in new markets to share risks over a larger market to take advantage of lower labour cost, lower taxation, cheaper natural resources (sometimes, because the domestic market is just too small for company growth) 1. What is internationalisation?

5. Firms generally go international by exporting their products first, then by establishing sale representatives in the foreign countries, and then possibly setting up production facilities Eventually, international firms may develop into: Multinational corporations (MNC): a firm that carries out its value chains in more than one country. It is generally headquartered in one home country while it also operates in one or more host countries. Trans-national corporations (TNC): a MNC that does not identify itself with any specific nation, but acquires truly international (i.e., not country-dependent) features and high local responsiveness 1. What is internationalisation? Siemens, Berlin, est. 1847 Royal Dutch Shell, est. 1907 British East India Company, est. 1600

6. Example: Cobra beer 1. What is internationalisation? Subsidiaries Licensed and brewed in the UK by Wells & Young's First brewed in Bangalore, India, by Mysore Breweries Majority of the firm acquired by a US-Canada brewer Exported to about 45 countries Exported to the UK Est. Fulham, London 1989 1990 1997 2009

7. Theories about international trade and localisation: Absolute cost advantage (Smith, 1776) Comparative cost advantage (Ricardo, 1817) Size of economic activity and distance (“gravity model of trade”) Market imperfections to exploit (e.g., proprietary technology, exclusive control of inputs, scale economies, control of distribution channels, etc.) Higher returns to scale and network effects that (possibly in conjunction with favourable government policies) shield industries from international competition (“new trade theory”) 2. Where do firms go international? The “global shift”

8. 2. Where do firms go international? The “global shift”

9. 2. Where do firms go international? The “global shift”

10. 2. Where do firms go international? The “global shift”

11. 3. How do firms go international? Entry strategies into foreign markets include: Merely exporting a firm's products into a foreign market, possibly with the support of trade brokers Licensing a firm's production and marketing process, or asking for royalties to be paid for the use of firm's assets and resources Franchising a firm's business Directly undertaking production and selling in a foreign country a) through a 'multinational approach' by adapting to local markets b) through a 'global approach' by mass-marketing the same product Strategic alliances and joint ventures with foreign firms

12. 3. How do firms go international? Entry strategies into foreign markets include: Merely exporting Licensing or asking for royalties Franchising a firm's business “Multinational approach” “Global approach” Strategic alliances and joint ventures

13. Internationalisation strategy brings about some issues, for example: Managing cultural differences Facing risk of exchange rate fluctuation (e.g., €/US$) Coping with unwelcoming host government policies 4. What issues do international firms face?

14. 5. What kind of institutions do support internationalisation? Among various institutions that support internationalisation, an important role is played by the Chambers of Commerce Abroad They are business associations established as private sector organisations, based on the principle of freedom of association, and that operate for the interests of their members without any obligation to assist the government (i.e., CCA are akin to so-called 'Anglo-Saxon model' rather than 'Continental model' CC).

15. 5. What kind of institutions do support internationalisation? Among various institutions that support internationalisation, an important role is played by the Chambers of Commerce Abroad They generally originate from the spontaneous gathering of businessmen and/or business company executives based in the same local area within foreign countries, that later apply for recognition of CCA status from home country public authorities or home national association of CC. The CCA play a silent albeit substantive role in trying to shape institutions and regulations of foreign markets (e.g., Amcham Belgium; Cowles, 1996, 2001, and Peterson and Cowles, 1998), although they have not been largely researched so far.

16. 5. What kind of institutions do support internationalisation? The CCA perform various activities: influencing economic and social actors for creating and seizing new business opportunities, working with rule-making organisations that affect international trade and foreign investments, preventing potential conflicts with stakeholders and minimising political risk, and actively engaging the media and other public arenas for safeguarding image and reputation of their members. The meaning of what they do – sometimes labelled “business diplomacy” – can be better defined by drawing some conceptual boundaries between their activities and those of other related concepts (Lakoff, 1987).

17. 5. What kind of institutions do support internationalisation?

18. 5. What kind of institutions do support internationalisation? Let us look at CCA established by four main EU countries... Germany (Die Deutschen Auslandshandelskammern, AHK) about 40,000 companies associated in 80 countries France (Union des Chambres de Commerce et d'Industrie Françaises à l'Etranger, UCCIFE) about 25,000 companies associated in 78 countries Italy (Assocamereestero) about 24,000 companies associated in 49 countries The UK (British Chambers of Commerce Abroad) in over 90 countries in 15 Asian countries (Bangladesh, Cambodia, China, India, Indonesia, Japan, South Korea, Laos, Malaysia, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam)

19. 5. What kind of institutions do support internationalisation?

20. 5. What kind of institutions do support internationalisation? Common membership services (access to members directory, subscription to newsletters and bulletin, access to sectoral industry publications and country reports, participation to social events, workshops, and seminars, attendance to language courses, benefits from CCA's media presence, and access to job seekers databases) “On demand” services for members (provision of information on specific companies or markets, the search and screening of potential suppliers and business partners, the organisation of and assistance for business meetings and trade missions, the organisation of and assistance for participating to trade fairs and exhibitions, the legal assistance for the establishment of businesses, business domiciliation and secretary services, legal assistance and advice, translation and interpreter services, advertisement and sponsorships, and employment services) Consultative and policy advocacy functions (members' committees focused on various thematic areas such as corporate social responsibility, industrial relations, education, young professionals, government relations, policy and consultation, sustainable development, taxation and regulation; they also serve to share information and updates on legislation, policy initiatives, government officers' political orientations, and turnover of key officers positions within the governmental bureaucracy)

21. 5. What kind of institutions do support internationalisation?

22. 5. What kind of institutions do support internationalisation? 'Escalation' at the EU, rather than domestic, level: Instance: establishment of European-ASEAN Business Centre in Thailand, by Eurochambers and various EU member states' CCA, under the patronage of the EU Commission. It aims to “drafting, publishing and dissemination of joint European industry position papers and lobby them to the Royal Thai Government in regards to new and existing regulations; supporting with trade related information, legal analysis and advisory services (IPR & Standard Helpdesk); organizing 'European Flagship' events/ conferences, seminars and EU pavilions at trade fairs to foster the European dimension in the business community; and interacting as the European business voice in Thailand” (EABC, 2011).

23. 5. What kind of institutions do support internationalisation? Contemporary institutional and political context includes EU's efforts to intensify bilateral or regional trade relationships with Asia ('Global Europe: Competing in the World', EU DG Trade, 2006) The coming into force of the Lisbon Treaty (2009) moved international trade policy, including trade of services, trade-related intellectual property rights protection, and foreign investment, to the exclusive competence of the EU Instance: Free Trade Agreement (FTA) between the EU and South Korea (signed 6.10.2010, come into force 1.7.2011). It is unprecedented in terms of scope and rapidity of tariff liberalisation and removal of non-trade barriers across several sectors (including automotive, pharmaceuticals, and consumer electronics). Regarded as a “template FTA” for other similar negotiations

24. 6. Summary Main points Internationalisation - the process through which a firm expands its business outside the national (domestic) market – is pursued because of several reasons The rapid growth of Asian economies triggers a 'global shift' of traditional established patterns of international trade and FDI Successful internationalisation calls for a careful entry strategy and capacity to cope with various issues Internationalisation of firms may be supported by various public and private organisations – including Chambers of Commerce Abroad