Course structure

1. Course structure Classes 1-4 Classes 5-9 Class 10 Classes 11-14 International business environment Regional vs. global Triad and IB activities Politics, culture, trade and finance Firm-specific advantages and firm management Organization Production Marketing International HRM Political risk management International financial management Country-specific advantages Locational choice and regional management European Union, North America, Japan, and Emerging Markets

2. Regional and Global Strategy, the Triad, Trade and FDI

3. Trade and investment Trade consists of exports and imports: Exports: goods and services produced in one country and then sold to another country. Imports: goods and services produced in one country and bought in another country. Foreign Direct Investment: consists of companies investing funds to start or improve operations in another country (influence, even control.) Different from portfolio investment –buying less than 10% outstanding stocks of a foreign company through stock exchanges, without pursuing any influence through, for instance, board membership.

4. Largest trading and investing nations 2012

5. List of Economies by Exports

6. List of Economies by Imports

7. List of Economies by FDI abroad

8. List of Economies by FDI received

9. The triad Most global transactions take place within and between three key regions: the United States, the European Union and Asia, notably Japan/China; these are referred to as: the “triad”.

10. 2012 statistics from WTO - Trade

11. Triad Regions(2005 vs. today) European Union The United States Asia, primarily Japan/China

12. The Multinational enterprise (MNE) A company headquartered in one country but with operations in one or more other countries.

13. 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

14. Internationalization Process:from domestic to multinational enterprises (MNEs)

15. The internationalization process Internationalization: The process by which a company enters a foreign market. Not all international business is done by MNEs. Indeed, setting up a wholly-owned subsidiary is usually the last stage of doing business abroad. Why do businesses wait to set up wholly-owned subsidiaries? Foreign markets are risky. Ownership (residual claim) is more risky than, for instance, franchise (a fixed pay upon contracts).

16. Figure 2.2 Entry into foreign markets: the internationalization process

17. License • Export • via Agent / Dealers • via Own Sales Reps • Local Packaging & Assembly • FDI (different entry modes) • Mergers & JVs • Acquisitions • Greenfield (totally new plant) Figure 2.2 Entry into foreign markets: the internationalization process

18. Level of Risk Figure 2.2 Entry into foreign markets: the internationalization process

19. Why internationalize? • Profit = (Price per unit –Cost per unit)*(Quantity sold)

20. Why FDI? • Example 1: • Apple Inc outsourced its assembly and packaging business to a Taiwanese-owned company Foxconn, whose major manufacturing operations are based in mainland China.

23. Why FDI? • Example 2: • On Jan 23, 2012, Porsche Centre Abu Dhabi opened a US$6 million, state-of-the-art Porsche Center that features the world’s largest Porsche service center.

25. Why do firms become MNEs? to diversify themselves against the risks and uncertainties of the domestic business cycle; to tap the growing world market for goods and services; to reduce costs;

26. Why do firms become MNEs? to diversify themselves against the risks and uncertainties of the domestic business cycle; to tap the growing world market for goods and services; to reduce costs; in response to foreign competition; to overcome barriers to entry into foreign markets; to take advantage of technological expertise by manufacturing goods directly. Any other ideas?

27. Frameworks for international strategies:Two perspectives

28. Two perspectives • Home country perspective • Why and how to go out? • Host country perspective • Where and how to go in?

29. A home-country perspectiveCSA/FSA Matrix by Alan Rugman Firm-specific advantages (FSAs): a unique capability proprietary to the organization It may be built upon product- or process technology, marketing- or distributional skills. Country-specific advantages (CSAs) – home countries: country factors Natural resource endowments (minerals, energy and forests), the labor force and associated cultural factors, etc.

30. From a home-country perspective: The FSA-CSA matrix

31. Cost efficiency Differentiation Focus Restructuring

32. A host-country perspectiveOLI paradigm by John H. Dunning Ownership advantages (O) Knowledge advantage Management, marketing, financial skills Vertical integration Control of resources Control of markets Internalization benefits (I) To enforce property rights and overcome other transaction costs To reduce buyer uncertainty To overcome government regulations Location factors (L) – Host countries National production functions Government controls and regulations Political risk; cultural values

33. From a host-market perspectiveOLI  Entry strategy

34. Case study 1:Wal-Mart Founded by Sam Walton in 1962 in Bentonville, Arkansas, Wal-Mart stores offered customers a broad range of goods, including lawn and garden, jewelry, shoes, electronics, family apparel, and toys. In the first year, Wal-Mart garnered $700,000 in sales, which increased to $5.4 million in 1974. In 1980, Wal-Mart became the youngest U.S. retail company, and the only regional retailer, to exceed $1 billion in net sales. During 1980s, Wal-Mart transformed itself into a national discount retailer, saturating regional markets and forcing the closure of other domestic retailers.

35. Wal-Mart in Europe Wal-Mart entered the European market in the late 1990s, acquiring stores in Germany in 1997 and United Kingdom in 1999. While its U.K stores prospered, the German branch remained unprofitable.

36. Wal-Mart In 1991, with net sales of $43.9 billion, Wal-Mart became the world’s largest retailer, and maintained this status since then. Between 1977-1992, Wal-Mart Stores experienced a 35% compound annual growth of both revenue and net profit. Between 1992-2003, revenue and net profit grew at 9% annually. In 2002, Wal-Mart’s revenue equalled 2.3% of US GDP. Total Wal-Mart sales on ‘Black Friday’ in 2002 equalled $14.2 billion, larger than the GDP of 36 countries.

38. Wal-Mart The largest company in the world It has more employees in uniform than the U.S. military It has the world’s largest private database, behind only the Sloan Digital Sky Survey If it were a nation, it would be China’s eighth-largest trading partner

39. FSAs: a successful business model Everyday Low Prices (EDLP), through aggressive bargaining with suppliers (and non-unionized employees) Acc. 2002 UBS, 14% lower than its rivals Zoning: efficient distribution system and inventory control 3% saving per item in purchasing costs due to logistics Retail Link satellite/computer system, a $4 billion investment Each store is within a day’s drive of a distribution center, which supplies 85% of inventory (compared to 50%-60% for competitors) Super-large market construction in suburban areas. Unique culture Sam Walton’s three key principles: To respect the individual To provide superior customer service (e.g., 24-hour service; helping bag purchases) To strive for excellence Sundown Rule: all concerns be addressed on the day of occurrence

40. Some Critics Low salaries of its employees: $18,000 per year in 2002 Highly publicized legal suits concerning its hiring practices Charges of failing to pay overtime Underpaying hourly workers Sexual discrimination (women make up 70% of store workers but 10% of management) Non-compliance with the Americans with Disabilities Act. ‘Locking in’ overnight workers Conspiring with cleaning contractors to underpay immigrant workers

41. Retail globalization US retail chains had a long history of globalization Woolworth in Canada in 1897; in UK in 1909; in Germany in 1926; Sears Roebuck & Co in Cuba in 1942; in Mexico in 1947. European retailers, notably German ones, led a second wave of globalization By 2003, Germany’s Metro Group made 47% of sales through it affiliates in 27 foreign countries, inc. China, India, Japan, Morocco, Russia, Turkey, Ukraine, and Vietnam. Dutch food retailer Royal Ahold in US in 1977 (BI-LO, Giant Food Stores, Finast, Tops, Stops & Stops, Giant Food Inc., and Peapot); in 2003, US operations accounted for nearly 75%.

42. Wal-Mart globalization A Late-comer, driven by flagging domestic growth. Intl division formed in 1993, after two JVs in Mexico in 1991. By 1997, 41 stores in Mecixo and 89 retail outlets (under various names) within its control. Into Puerto Rico in 1992. Into Canada in 1994.

43. Next stop: Germany The largest consumer market in Europe 15% of the continent’s $2 trillion annual retail market in 2001 In 1997, Wal-Mart acquired Wertkauf chain (24 stores) from the Mann Family and the unprofitable Interspar chain (74 stores) in 1998 for a combined $1.6 billion. Both equalled <3% of the market. Interspar stores were in poor repair and in poor locations. The leading German retailer was Metro Group, followed by Rewe Group.

44. Immediate actions Wal-Mart started by refurbishment of stores to improve their appearance and the maintenance of price leadership through cost efficiency. Overhaul of the supply chain systems Implementation of new scanning systems Centralized distribution High quality customer service (e.g., helping bag purchases) The fiercest price war in Germany’s recent history

45. German rules Unexpected regulatory obstacles Stringent zoning requirements Price regulations Limited store hours More influential unions

46. zoning In 1997, Germany had app. 2,000 large-surface-area “green field” retail sites, inc. hypermarkets, furniture stores, and home goods suppliers, all of which had been built before 1977. In 1977, Germany had enacted strict planning and zoning regulations (“building use plan”) designed to protect traditional retailers. The legislation prohibited the construction of stores with more than 800m2 (8,610 ft2) sales area in locations not designated for retailing. Indeed, by 2001, Wal-Mart had only managed to open two new stores, and enlargement of existing stores.

47. Zoning (cont’d) Opening a new large-surface-area store outside of an urban center was technically possible, it required clearing several difficult hurdles. A neighboring city/town was required to create a “building use plan” Environmental and conservation concerns, & potential private legal conflicts No potential direct competition with stores in nearby towns The reality: almost no new extra-urban hypermarkets were opened in Germany since 1977

48. zoning (cont’d) “What Germany fears is the experience of cities like Bordeaux, which had lost retail business to green field sites outside of town. All that is left is old buildings and monuments in the city center … We don’t want cities that look like the United States.” -- Holger Wenzel, Head of German Retail Federation.

49. Pricing Conflict with Germany’s Federal Cartel Office, e.g., German Rebate Law Wal-Mart’s price guarantee, which offered to refund the price diff between WM price and any competitor advertising a lower price. The Law prohibited any retailer from selling a product more than 5% below its posted price. 1998 amendment: “selling below cost is forbidden except for good justification” in order to protect existing business. In June of 2000, the Cartel Office fined Wal-Mart $308,000 for violating the 1998 amendment. Without a sizable scale of customers, Wal-Mart did not enjoy a high bargaining power with local suppliers and logistics. In 2001, WM price were 11-25% higher than its German rivals.

50. Labor Relations In late May 2002, Germany’s service sector union Ver.di, the largest union in the world, filed a lawsuit against the company, citing Wal-Mart Germany’s violation of HGB for not releasing year-end figures for 1999 and 2000. Public figures for employees to negotiate wages and ensure job security Wal-Mart’s response: Ver.di was not a legitimate plaintiff. In April 2003, an appeal by Wal-Mart was dismissed and a fine of 330,000 euro assessed. In July 2002, Ver.di organized 2,000 WM employees for a two-day strike to get WM into HDE, Germany’s retail sector employers’ association.