Globalization of business
- 1. GLOBALIZATION OF BUSINESS • A business is GLOBAL/internationalized when it operates or sells its products in foreign countries. • Give examples of Kenyan companies
- 2. FORCES OF GLOBALIZATION • There are several reasons why firms may seek business opportunities abroad; • Market saturation at home • Economies of scale • Extend the product life cycle • Risk diversification • Sourcing economics • Exploit foreign market opportunities • Presence in competitors' home markets • Oligopolistic reaction • Overcome foreign market trade barriers
- 3. Cont • Utilize excess capacity • Management enthusiasm • Tax benefits • Dumping • Stabilization of demand • Prestige
- 4. INTERNATIONALIZATION PROCESSES AND THE EXPORT BEHAVIOR THEORIES • The Internationalization process is the process by which a business firm develops international business operations i.e the process of becoming global. • The behavior and stages firms go through in this process has been a subject of research for decades. The following four models or theories are prominent among the attempts by scholars to understand and explain the process.
- 5. 1. The Uppsala School Model • Johanson and Wiedersheim Paul (1975) in their empirical study of four actual exporters found that the export decision was a gradual process occurring in stages rather than a large spectacular investment. • They found that some expansion, immediately outside the national market but within the immediate geographical region preceded internationalization.
- 6. Cont • Their model identified the following four stages of internationalization process: • Stage 1: No regular export activities. • Stage 2: Export-via-overseas agents. • Stage 3: Establishment of an overseas sales subsidiary. • Stage 4: Overseas manufacturing production. • The Uppsala school model influenced subsequent writings on the subject.
- 7. 2. Bilkey and Tesar Model • Bilkey and Tesar (1977) studied Winscosin exporters and identified the following six stages of the process: • NB; • The concept of psychological closeness of one market to another soon proved to be an important and useful finding. It influenced subsequent research on the subject.
- 8. Cont • Stage 1: Management is not interested in exporting and would not even fill an unsolicited order from a foreign market. • Stage 2: Management is willing to fill solicited orders but makes no effort to explore the feasibility of active exporting. • Stage 3: Management actively explores the feasibility of exporting. • Stage 4: The firm is an exporter on an experimental basis to some psychologically close country. • Stage 5: The firm is an experienced exporter to the psychologically close country. • Stage 6: Management explores the feasibility of exporting to additional countries which are psychologically more distant.
- 9. 3. The Incremental Internationalization process of the Firm Model • Cavusgil and Neyin (1980) subsequently refined Bilkey and Tesar’s model. They identified the five stages: • Stage 1: Domestic business - where the firm sells only to the home market. • Stage 2: Pre-export stage - where the firm searches for information and evaluates the feasibility of undertaking exporting. • Stage 3: Experimental involvement - where the firm starts exporting on a limited basis to some psychologically close countries.
- 10. Cont • Stage 4: Active involvement - where the firm engages in exporting to more new countries, direct exporting and there is increase in export volume. • Stage 5: Committed involvement - where management constantly makes choices in allocating limited resources between domestic and foreign markets.
- 11. Note • The model is incremental because the process changes in small steps, one small step leading to the next step. • According to the incremental model, the internationalization approach does not appear to be a sequence of deliberately planned steps that begin with a clearly defined problem proceeding through a rational analysis of behavioral alternatives. • Personal characteristics of the decision-makers, lack of information, perception of risk and presence of uncertainty seem to be especially valuable in understanding a firm's involvement in international business.
- 12. Czinkota's Six Stage Model • Czinkota (1982) in his studies revealed that there are aspects of the internationalization process which have both a learning sequence as well as export stages. • His six-stage model overlaps with the three earlier models, but emphasizes the experimentation aspect and the differences that may be induced by company size. The six stages are as follows:
- 13. Cont • Stage 1: The completely uninterested firm • Stage 2: The partially interested firm • Stage 3: The exploring firm • Stage 4: The experimental exporter. • Stage 5: The experienced small exporter. • Stage 6: The experienced large exporter.
- 14. Questions • Which of the four export behaviors reflect the internationalization process of Kenyan firms? • Is the internationalization process independent of the following? Industry Size of firm Level of economic development Entrepreneurial cultural background Personal characteristics of owners e.g. level of education
- 15. GLOBALIZATION OF BUSINESS • What do you understand by the concept of Globalization • The world is a global village • Think global, act local • It has been argued that mere internationalization of business does not amount to globalization. Do you agree? Why or why not? If not. What then does globalization mean?
- 16. Two perspectives proposed • While one perspective is more perceptual in nature, the other refers to the way in which a firm has internationalized its business. • The perceptual approach contends that globalization of business while referring to a business that is internationalized depends more on how the management of the business perceive their business. If they perceive their business then the business should be regarded as so, because the decisions and strategies they adopt will be based on that understanding. • The perceptual meaning makes a lot of sense because what really matters in globalization are the activities of the firm. A firm may not be globalized in the way it has internationalized its business, but if its activities are characteristic of those of global businesses then the firm could be regarded as global.
- 17. Cont • The implication is that a global firm" which does not behave as a global firm is of no consequence in globalization. • Globalization as the way in which a firm has internationalized its business refers to spreading out internationally. This is the most widely accepted meaning. • According to this perspective, the width of a firm’s international involvement is important in determining whether a firm is globalized or not. • The above not withstanding, depth of such involvement is also important, because globalized firms usually operate in foreign markets through foreign direct investment (FDI). Foreign direct investment represents the greatest or deepest involvement in foreign markets.
- 18. HISTORICAL BACKGROUND OF GLOBALIZATION • The concept of globalization has only recently (i.e. in the 20th century) been popularized through the spread of multinational enterprise. • The roots of globalization, however, date back to the 16th century when European nations struggled to establish empires worldwide, • The Dutch and the British East India companies were perhaps among the earliest MNEs. • In late18th century many European firms globalized by setting up manufacturing facilities in their colonies to extract raw materials. • In mid 19th Century many US firms began to globalize by setting up business plants in various parts of the world in late 20th century most Japanese firms joined the globalization race, although they had been major exporters prior to World War II. • By the 1970s, the process of globalization propelled by the MNEs was quite entrenched, marked by tremendous movement of people, knowledge, capital, goods, services, and technology across borders.
- 19. FORCES OF GLOBALIZATION • Forces of globalization are the reasons for which firms globalize or expand internationally. • The reasons can be both reactive and proactive. Proactive if managers are expanding the firm in order to give the firm a competitive edge or advantage over its competitors. Many times globalization is done for reasons that are reactive and proactive at the same time.
- 20. Reactive Reasons • Trade barriers; May be avoided by operating within the countries that have imposed import barriers. • International customers; To continue serving major customers in the countries that they may go to. • International competition; To be at par with competitors who enter other countries. • Regulations; May increase the cost of doing business at home, and hence the need for foreign markets. • Chance; Unexpected events can prompt a firm to enter foreign markets
- 21. Proactive Reasons • To access additional resources. • To take advantage of lower costs that may exist in other countries i.e. cost advantages in other countries. • Incentives offered by home or host country government. • To make use of excess resources or capacity. • To exploit firm specific strengths or advantages e.g. exploiting other markets by selling a popular brand in those markets. • To take advantage of lower tax rates in other countries. • Economies of scale i.e. selling to more than one country may allow for large-scale production. • Synergy • Certain markets can offer a firm synergistic advantages. Extending operations to such markets provide opportunities to combine benefits from, different locations.
- 22. Cont • This can be done in such a way that the total value would far outweigh the sum of the benefits that would accrue if business in each of the locations were dealt with in isolation of the other locations. That is 2+2 = 5 and may not be 4 due to synergy • This is because operations in certain locations may be extended to other locations without necessarily incurring as much expenditure. • Power and prestige • The image of being international may increase a company's power and prestige. This can have a positive impact on domestic sales and relations with various stakeholder groups. • Protect home market through offense in competitor's home • A strong offense in a competitor's market can put pressure on the competitor that results in a pull back from foreign activities to protect itself at home.
- 23. Recap • Changes in the world environment are bringing totally new opportunities and threats to firms and individuals. • The challenge is to compete successfully in the global marketplace as it exists today and develops tomorrow.
- 24. IS GLOBALIZATION AN OPPORTUNITY OR A THREAT? • Opportunity • A foreign-owned company (or call it a multinational company) from a developed country would bring a reliable electricity source to a less developed country like Kenya, by building a hydroelectric dam. • Similarly, a local Kenyan commercial bank would open a branch in Juba to promote new businesses in Southern Sudan. • The World Bank gives loans to member countries worldwide to support a network of entrepreneurs, for instance in developing countries.
- 25. A Threat • Entry into the world economy causes its share of problems. i.e. international business mainly increases the wealth of corporations and investors at the expense of the poor. • Other accusations are as follows: (1)It supports dictators, (2)It fails to relieve the massive debts of developing countries, (3)It spoils the environment, (4)Labor is exploited, and (5)It causes terrorism, etc.
- 26. Cont • From the above, it may be argued that changes in the world environment are bringing totally new opportunities and threats to firms and individuals. • In response to this, many international firms have begun to revise some of their practices, suggesting that a middle ground might be found. • For instance, in 2003, the IMF released a report that stated that countries that follow IMF suggestions often suffer a ‘collapse in growth rates and significant financial crises,” and admitted it was considering changes in its practices. • The World Bank has also made changes to the way it operates by shifting its focuses away from government loans to microcredit schemes, and increasing the input from locals in countries it is trying to help.
- 27. The Need for International Business • International business combines the science and the art of business with many other disciplines, such as economics, anthropology, geography, history, language, jurisprudence, statistics, and demography. • International business is important and necessary because countries can no longer afford to be isolated. • Those who fail to become a part of the global market suffer both declining economic influence and the standard of living for their citizens. • Successful participation in international business, however, holds the promise of improved quality of life and a better society, even leading, some believe, to a more peaceful world.
- 28. • Nations must take on the challenge of competing aggressively in the international arena or risk becoming a second-rate power in today’s borderless economy.
- 29. Concept of International Business • International business consists of transactions that are devised and carried out across national borders to satisfy the objectives of individuals and organizations. • In its many forms international business ranges from export-import trade to licensing, joint ventures, wholly owned subsidiaries, turnkey operations, and management contracts. • As the definition indicates, the basic business tenet of “satisfaction” is retained. • The fact that the transactions are across national borders highlights the difference between domestic and international business.
- 30. Cont • The definition also focuses on international transactions. The use of this term recognizes that doing business internationally is an activity. Subject to constant change, international business is as much an art as a science. Yet success in the art depends on a firm grounding in the scientific aspects. • Individual consumers, policy-makers, and business executives with an understanding of both aspects will be able to incorporate international business considerations into their thinking and planning.
- 31. Key Decisions 1. How will my idea, product, or service fit into the international market? 2. What adjustments are or will be necessary? 3. What threats from global competition should I expect? 4. What are my strategic global alternatives? • When management integrates these issues into each decision, international markets can provide growth, profit, and needs satisfaction not available to firms that limit their activities to the domestic marketplace.