Fluent Essays

Please read Case Study 1.1 Transworld Minerals on pages 28-30 of the ebook. This case discusses the expansion into Salaysia of Transworld Minerals Inc. Please consider the different ways to internationalize in this case while keeping the peace with the domestic Salaysian Coal Mining Company.Question 1:What additional incentives should Wright suggest to improve the attractiveness of Transworlds proposal to the Industries Ministry.Question 2:What strategy should Transworld adopt to offset the political advantage enjoyed by the Salaysian Coal Mining Company? ajamigoddard_2015_ch_01_an_introduction_to_international_business__1_.pdf Unformatted Attachment Preview Copyright @ 2015. Routledge. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. Chapter 1 An Introduction to International Business and Multinational Corporations “The first thing to understand is that you do not understand.” —Søren Kierkegaard Chapter Objectives This chapter will: • Present the historical context of international business and establish the role of multinational corporations in the current business environment • Describe the various operating advantages and disadvantages facing the multinational corporation The quote above by the Danish philosopher Kierkegaard was intended for a philosophical interpretation, but the quote could just as easily apply to international business. Countless businesses have failed in their international expansion effort because they did not heed these words. For students as well as for business professionals, the successful entry into foreign markets must come with the realization that everything is not necessarily the same as in the domestic market. This first chapter will provide examples of some companies that have been successful by learning how to successfully compete in today’s global marketplace. But first, the subject of international business must be discussed in its historical context. 3 EBSCO : eBook Collection (EBSCOhost) - printed on 12/13/2018 8:52 AM via BARRY UNIV AN: 929355 ; Ajami, Riad A., Goddard, G. Jason.; International Business : Theory and Practice Account: s8987890.main.ehost Copyright @ 2015. Routledge. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 4 Chapter 1 • An Introduction to International Business and Multinational Corporations Current Scope and Historical Antecedents In the world of business in the twenty-first century, vast business interrelationships span the globe. Far more than ever before, products, capital, and personnel are becoming intertwined as business entities increasingly consider their market areas as global rather than simply domestic or even foreign. More and more companies, some of which have annual sales levels larger than the gross national product of some countries, consider every corner of the globe a feasible source of raw materials and labor or a new market possibility. As business has expanded across national borders, it has been followed by banks and financial institutions to meet the need for capital for investment and operations around the world. Financial markets have also become intricately linked, and movements and changes in the US stock market have a direct impact on equity markets in other parts of the world. Today, only a naive businessperson would believe that an enterprise can grow and prosper entirely within the confines of its domestic market borders. The phenomenon of global expansion is not only for large corporations, as evidenced by the success of Germany’s Mittelstand. These are medium-sized, family-owned businesses that have experienced much success in exporting in recent years. Domestic business must at least be aware of international sources of competition, because they are an ever-present and growing threat as international business relationships become increasingly intricate and complex. The source of these changes in the dynamics of world markets and economies is international business activity being pursued around the globe. What Is International Business? In its purest definition, international business is described as any business activity that crosses national boundaries. The entities involved in business can be private, governmental, or a mixture of the two. International business can be broken down into four types: foreign trade, trade in services, portfolio investments, and direct investments. In foreign trade visible physical goods or commodities move between countries as exports or imports. Exports consist of merchandise that leaves a country. Imports are those items brought across national borders into a country. Exporting and importing constitute the most fundamental, and usually the largest, international business activity in most countries. In addition to tangible goods, countries also trade in services, such as insurance, banking, hotels, consulting, and travel and transportation. The international firm is paid for services it renders in another country. The earnings can be in the form of fees or royalties. Fees are generated through the satisfaction of specific performance and can be earned through long- or short-term contractual agreements, such as management or consulting contracts. Royalties accrue from the use of one company’s process, name, trademark, or patent by someone else. EBSCO : eBook Collection (EBSCOhost) - printed on 12/13/2018 8:52 AM via BARRY UNIV AN: 929355 ; Ajami, Riad A., Goddard, G. Jason.; International Business : Theory and Practice Account: s8987890.main.ehost Figure 1.1 World FDI Inflows, 1998–2010 2,500 1,970.90 2,000 1,744.10 US$ billions Copyright @ 2015. Routledge. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. Current Scope and Historical Antecedents 1,461.90 1,402.7 1,500 1,185.00 1,089.60 982.6 826.2 1,000 707.6 1,243.70 742.4 626.9 572.8 500 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year One example of a fee situation is the turnkey operation, in which a foreign government or enterprise hires the expertise appropriate to starting a new concern, plant, or operation. The turnkey manager goes into the foreign environment and gets an operation up and running by designing the plant, setting up equipment, and training personnel to take over. The foreign firm then takes over the reins of management and continues operating the facility. Alternatively, a firm can earn royalties from abroad by licensing the use of its technology, processes, or information to another firm or by selling its franchise in overseas markets. Portfolio investments are financial investments made in foreign countries. The investor purchases debt or equity in the expectation of nothing more than a financial return on the investment. Resources such as equipment, time, or personnel are not contributed to the overseas venture. Direct investments are differentiated by much greater levels of control over the project or enterprise by the investor. The level of control can vary from full control, when a firm owns a foreign subsidiary entirely, to partial control, as in arrangements such as joint ventures with other domestic or foreign firms or a foreign government. The methods of conducting international business will be discussed more thoroughly in subsequent chapters. As is illustrated in Figure 1.1, the level of foreign EBSCO : eBook Collection (EBSCOhost) - printed on 12/13/2018 8:52 AM via BARRY UNIV AN: 929355 ; Ajami, Riad A., Goddard, G. Jason.; International Business : Theory and Practice Account: s8987890.main.ehost 5 EBSCO : eBook Collection (EBSCOhost) - printed on 12/13/2018 8:52 AM via BARRY UNIV AN: 929355 ; Ajami, Riad A., Goddard, G. Jason.; International Business : Theory and Practice Account: s8987890.main.ehost Ϭ͘ϬϬ ϮϬϬ͘ϬϬ ϰϬϬ͘ϬϬ ϲϬϬ͘ϬϬ ϴϬϬ͘ϬϬ zĞĂƌ ϭϵϵϬ ϭϵϵϭ ϭϵϵϮ ϭϵϵϯ ϭϵϵϰ ϭϵϵϱ ϭϵϵϲ ϭϵϵϳ ϭϵϵϴ ϭϵϵϵ ϮϬϬϬ ϮϬϬϭ ϮϬϬϮ ϮϬϬϯ ϮϬϬϰ ϮϬϬϱ ϮϬϬϲ ϮϬϬϳ ϮϬϬϴ ϮϬϬϵ ϮϬϭϬ ĞǀĞůŽƉŝŶŐĂŶĚdƌĂŶƐŝƟŽŶ ĞǀĞůŽƉĞĚĞĐŽŶŽŵŝĞƐ Source: Inward and outward foreign direct investment flows, annual, 1990–2010, UNCTAD Stat, http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx. h^ΨďŝůŝŽŶƐ ϭ͕ϬϬϬ͘ϬϬ ϭ͕ϮϬϬ͘ϬϬ ϭ͕ϰϬϬ͘ϬϬ Figure 1.2 FDI Inflows Developed vs. Developing and Transition Copyright @ 2015. Routledge. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 6 Copyright @ 2015. Routledge. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. Current Scope and Historical Antecedents direct investment (FDI) peaked at $1.970 trillion in 2007, the year of the global economic downturn. Since 2007, FDI growth has slowed the most in developed economies. While the developed economies in Europe were the leading destination of FDI prior to the 2007 financial crisis, FDI has decreased from $895 billion in 2007 to $313 billion in 2010. Combined developing and transitioning economies’ FDI peaked in 2008 at $778.9 billion, while developed economies FDI slowed to $965 billion. As illustrated in Figure 1.2, more FDI is now flowing to developing and transition economies than flowing to developed economies.1 Brief History of International Business International business is not new, having been practiced around the world for thousands of years, although its forms, methods, and importance are constantly evolving. In ancient times, the Phoenicians, Mesopotamians, and Greeks traded along routes established in the Mediterranean. Commerce continued to grow throughout history as sophisticated business techniques emerged, facilitating the flow of goods, resources, and funds between countries. Some of these business methods included the establishment of credit for exchange, banking, and pooling of resources in joint stock ventures during the Renaissance period. This growth was further stimulated by colonization activities in the seventeenth and eighteenth centuries, which provided the maritime nations with rich resources of raw materials as well as enormous potential markets in the new worlds. The Industrial Revolution further encouraged the growth of international business by providing methods of production for mass markets and more efficient methods of utilizing raw materials. As industrialization increased, greater and greater demand was created for supplies, raw materials, labor, and transportation. The flow and mobility of capital also increased as higher production provided surplus income, which was, in turn, reinvested in further production domestically or in the colonies. The technological developments and inventions resulting from the Industrial Revolution accelerated and smoothed the flow of goods, services, and capital between countries. By the 1880s the Industrial Revolution was in full swing in Europe and the United States, and production grew to unprecedented levels, abetted by scientific inventions, the development of new sources of energy, efficiencies achieved in production, and new forms of transportation, such as domestic and international railroad systems. Growth continued in an upward spiral as mass production met and surpassed domestic demand, pushing manufacturers to seek enlarged, foreign markets for their products. It led ultimately to the emergence of the multinational corporation (MNC) as a new organizational entity in the international business world. In more modern times, the creation of the internet as an electronic commerce platform and the ever-expanding capacity of telecommunications and technology have contributed to an increased expectation for product and service quality and availability throughout the world. As global markets become increasingly interconnected, the benefits of integration have become more obvious, as have the pitfalls of the increased speed of transactions. EBSCO : eBook Collection (EBSCOhost) - printed on 12/13/2018 8:52 AM via BARRY UNIV AN: 929355 ; Ajami, Riad A., Goddard, G. Jason.; International Business : Theory and Practice Account: s8987890.main.ehost 7 Copyright @ 2015. Routledge. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 8 Chapter 1 • An Introduction to International Business and Multinational Corporations The current form of international business is a continuation of globalization that began long ago, with no end in sight for its future march of progress. The Multinational Corporation During its early stages, international business was conducted in the form of enterprises that were owned singly or in partnerships. As the size of organizations grew with industrialization and need for capital by companies increased, corporations began to displace privately held firms. These corporations had the distinct advantage of being entities with a separate legal identity, consequently limiting the liability of the principals or owners. At the same time, by issuing shares of stock, the corporation could tap an enormous pool of excess funds held by potential individual investors. With the emergence of the multinational enterprise in the late 1800s and early part of the twentieth century, the corporation underwent yet another modification.2 Some early multinational enterprises were those that sought resources and supplies abroad, such as oil in Mexico (Standard Oil), precious minerals in North America (Amalgamated Copper, International Nickel, Kennecot), fruit in the Caribbean (United Fruit), or rubber in Sumatra (U.S. Rubber). Other firms entered foreign markets in a search for markets to absorb their excess domestic production or to obtain economies of scale in production. Some of these early market seekers from the United States were Singer, National Cash Register Company, International Harvester (now Navistar International), and Remington, who sought to use their advantages of superior metal production skills against European producers. These early entrants were quickly followed by companies with other areas of expertise, such as Cable Telephone (now Norvado), Eastman Kodak, and Westinghouse. All of these early US multinational firms marketed their products primarily in the neighboring countries of Canada and Mexico and in European markets. Definition of a Multinational Corporation There is no formal definition of a multinational corporation, although various definitions have been proposed using different criteria. Some believe that a multinational firm is one that is structured so that business is conducted or ownership is held across a number of countries or one that is organized into global product divisions. Others look to specific ratios of foreign business activities or assets to total firm activities or assets. Under these criteria, a multinational firm is one in which a certain percentage of its earnings, assets, sales, or personnel come from or are deployed in foreign locations. A third definition is based on the perspective of the corporation, that is, its behavior and its thinking. According to this definition, if the management of a corporation holds the perception and the attitude that the parameters of its sphere of operations and markets are multinational, then the firm is indeed a multinational corporation. In his study of the topic, Howard V. Perlmutter3 looked at the attitude held by the EBSCO : eBook Collection (EBSCOhost) - printed on 12/13/2018 8:52 AM via BARRY UNIV AN: 929355 ; Ajami, Riad A., Goddard, G. Jason.; International Business : Theory and Practice Account: s8987890.main.ehost Copyright @ 2015. Routledge. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. Current Scope and Historical Antecedents decision-makers of an organization and differentiated between ethnocentric, polycentric, and geocentric organizational types. Ethnocentric organizations are those that are focused in a home or domestic environment and therefore exclude MNCs. Polycentric organizations have investments, operations, or markets in several countries, but do not integrate the management of these international functions. Geocentric organizations, on the other hand, are integrated and have a world perspective regarding the breadth and reach of possible organizational operations. Some students of international business (and sticklers for linguistic accuracy) dispute the use of the terms “global” or “world” corporation in reference to MNCs. They argue that a truly global corporation or enterprise looks to every market in the world as a potential market and allocates resources without regard for the location of its home country. Under this definition, for example, an international corporation with subsidiaries and markets in Europe and South America would not be considered a global enterprise. As the globalization of international markets has continued, more firms have realized that the key to their future success depends upon increasing their business activities in other parts of the world (including China, India, and Southeast Asian nations). The existence of different definitions for multinational corporations is not surprising. There are many different types of multinational corporations and most definitions characterize only a particular type. Because there are so many possible ways in which a corporation can be organized and transact business across national borders, it is indeed very difficult for any one definition to adequately describe all forms of multinational corporations. Another problem in standardizing the definition of a multinational corporation is the gradual evolution of purely domestic companies to multinational status. In this process, the point at which a company becomes a multinational cannot be clearly demarcated. Such demarcations, if at all possible, also cannot explain or describe adequately the wide differences in the extent to which corporations have gone international. The United Nations does not use the terms “multinational corporations” or “multinational enterprises.” Instead, it calls them “transnational corporations,” but this term is not used widely. This text will use the terms “multinational corporation” (MNC) and “multinational enterprise” (MNE) interchangeably to identify a firm that conducts international business from a multitude of locations in different countries. Multinational Corporations Come of Age The multinational corporation began to flourish in the decade following World War II, primarily in the United States. It was spurred by reconstruction efforts in Europe and an inflow of US dollars geared to take advantage of new opportunities as countries of the ravaged continent attempted to rebuild their economies. US corporations, having prospered through wartime demand, channeled investments into other countries, notably in Europe and Canada. During the period from 1950 to 1970, the book value of US direct foreign investments skyrocketed from $11.8 billion to $78.1 billion.4 EBSCO : eBook Collection (EBSCOhost) - printed on 12/13/2018 8:52 AM via BARRY UNIV AN: 929355 ; Ajami, Riad A., Goddard, G. Jason.; International Business : Theory and Practice Account: s8987890.main.ehost 9 Copyright @ 2015. Routledge. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 10 Chapter 1 • An Introduction to International Business and Multinational Corporations Table 1.1 The World’s Biggest Public Companies, April 2012 (US$ billions) Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Company Walmart Stores Royal Dutch Shell Exxon Mobile Sinopec China Petroleum BP Petro China Volkswagen Total Toyota Motor Chevron Glencore International Samsung Electronics E.ON Phillips 66 Apple ENI Berkshire Hathaway General Motors Daimler AXA Group Revenue $469.20 $467.20 $420.70 $411.70 $370.90 $308.90 $254.00 $240.50 $224.50 $222. ... Purchase answer to see full attachment