Internationalisation Strategies - Appunti

International strategies 11-03 global market scenario

Global market scenario:

• Drivers of globalization
• International trade
• Foreign direct investment
• Managerial implications

Global market scenario → internalization main decisions → market evaluation approach

• Changes in the world economy
• Moving to an integrated economy - what is globalization
• Globalization of market and globalization of production
• Globalization - drivers and impacts
• International trade
• FDI
• Managerial implications - how to manage the process of globalization

Changes in the world economy

During the past five decades, some broad changes have been occurring in the world economy:

• Barriers to cross-border trade and investment are declining
• Perceived distance is decreasing due to advances in transportation and telecommunication technology
• National economies are merging into an interdependent integrated global economic system
• The world economy is growing
• Relevant demography changes, in terms of migrations, urbanization, aging are emerging
• Role of new actors - new players are emerging
• A different concept of cultural distance

This ongoing relevant transformation is commonly referred to as globalization (a process that can’t be stopped)

• Shift toward a more integrated and interdependent world economy
• Process by which people, products, information and money can move freely across borders

→ Globalization of markets and globalization of production as two facets of globalization

Globalization of market

Globalization of market - merging of distinct national markets into one huge marketplace as a consequence of

• Reduction of barriers to foreign trade and investment
• Global tastes for products that serve universal needs
• Competitors may not change among nations in many global industries - Coca-Cola, McD
• Not only large companies but also small firms are exposed to the globalization phenomenon - financial services, components, commodities

There is only the global market not the national or the across-border countries, more and more products are global products.

→ Nevertheless, still significant differences between national markets (differences in consumer tastes and preferences, differences in culture, business, and legal systems)

• Food sector - quite difficult we can speak about global food or some food for all the people in the world - differences in taste and differences are still important
• Uber - redefine entry strategies according to the local law and regulatory system

Given these differences, companies need to adapt their strategies and to implement the strategies and match the conditions of a particular country.

Globalization of production

Globalization of production- related to the international delocalization of production

• Global goods procurement to take advantage of differences in cost and quality for factors of products (labor, energy, land and capital) to lower overall cost or improve the quality allowing to compete more effectively
• Not only outsourcing of manufacturing but also service activities, thanks to modern communication technology - aircraft part of wings in Singapore and other in Italy
  • 30% of Boeing 777 are built from not national companies with outsourcing
    • These suppliers are the best in the world with their own activities
• Globalization of products not related only to production but also to services activities related to the production taking advantages also about modern communication technology in particular of the internet as well known to outsource services activity to low-cost production in other nations
• The time zone can compress time and lower costs - working on software and deliver them when the other office is still sleeping

→ Consequence - the outsourcing of productive activities results in the creation of global products

• Increasing revenues by selling around the world
• Low costs
• International institution WTO - reduce barriers to international trade and investments
• Transformation of the economic system - China privatization

→ Both small and big companies enlarge their possibilities to become internationalize

12-03 globalization: two main drivers

• Decrease of barriers to international trade and investment - decline in barriers to the free flow of goods, services, and capital and increase in the number of trade agreements implemented in the world. Effects on world trade and FDI
• Increase of technological innovations - developments in communication, information processing and transportation technologies) which causes:
  • Changes in consumption patterns
  • Cultural integration

View the world as a single marketplace rather than the sum of single countries

Effect of these trends - how these trends are related to the world in terms of exports changed as a consequence of a reduction of barriers from the point of view of the actors

US - 38% in 1960 measured in GDP in 2018 accounted for 24% of world output

The decreasing trend concerns also other countries such as DE, FR, IT and UK.

China and other emerging countries raise their world output.

These data don’t describe the decline of the industrialized countries, but rather point out the faster raise of the other economies.

Forecast

• The continued rise in the world output share of developing nations such as China, India, Russia, Indonesia, South Korea, Mexico and Brazil
• The decline in the share of rich industrialized countries such as UK, JP, DE US
• World Bank estimation in that today’s developing nations may count for more than 60% of world economic activity by 2030 while today’s rich nations, which currently account for more than 55% of world economic activity - may account for only about 38%

Implications for international business

• Many economic opportunities may be found in the developing nations of the world
• Many of the most capable competitors will also emerge from these regions

→ Emerging markets Next eleven - are the 11 countries that are poised to become the biggest economies in the world in the 21th century

• As the barriers to the free flow of goods, services, and capital fell and as other countries their shares of world output, non-US firms increasingly began to invest across national borders, to disperse production activities to optimal locations and to build a direct presence in attractive foreign markets
• Firms invest more today outside their country than they did in 1995 - the 196 countries in the world today invest 34.6% of their GDP outside its country borders, an increase from 12.8% in 1995 the world is becoming more globalized in investment attitude

Effect of COVID-19 - it is a forecast also for 2020/2019 still be prevision - very difficult to gather them about the near past years and phenomena

• Toyota thought that a strong yen would have decreased exports and implement investment to contrast growing political pressure in US to limit the export from Japan
  • Change the strategy to develop and implement a delocalization in production also outside the Japanese market

FDI inflows

FDI inflows (in mil dollars):

• Growth of foreign direct investment happened since 1990- the amount of investment directed at both developed and developing nations increased dramatically
• The increasing importance of developing nations as the destination of foreign direct investment: FDI inflows in developing countries have exceeded those in developed countries in ever since 1990
  • Among developing nations, the largest recipient has been China
  • The sustained flow of foreign investment into developing nations is an important stimulus for economic growth

Two important trends

• The rise of non-US multinational: during the 1960s, Us firms accounted for about ⅔ of FDI, in 2003 they accounted for 39% of the top 2000 multinational corporations. The large number of US multinationals has long reflected US economic dominance in the half a century after WWII. In 2017, only 27% of the top 2000 global firms are US multinationals and this trend can be expected to be continued.
  • Firms from developing nations are emerging as important competitors in global markets, further shifting the axis of the world economy away from North America and Western Europe (s.c. developed world)
• The growth of SMEs multinationals (mini-multinationals): medium size and small business are becoming increasingly involved in international trade and investment (the rises of the internet is lowering the barriers that small firms face in building international sales)

Consequences of globalization effect of a decline in barriers

• Firms view the world rather than a single market
• Firms base production at the optimal location for that activity (to drive down production costs and increase production quality)
• As trade expands, nations are becoming increasingly dependent on each other for important goods and service
• As world trade and FDI growth, firms are finding their home markets under attack from foreign competitors
• The growing integration of the world economy into a single marketplace is increasing the intensity of competition in the manufacturing and service industries

Implications

For Globalization of market → firms view the world rather than a single country, as their market

Globalization of production → firms locate production activities in the optimal location:

• Design a product in one country
• Product component parts in two other countries
• Assemble the product in yet another country
• Export the finished product around the world

→ Small firms have a different approach as their foreign market is the near-to-the-border one.

The development of international trade (goods, components, technologies) has fostered and helped the growth, the integration and the independence of the world economy. → The growth of world economy contributes to the further reduction of barriers which in turn increases the trade and which in turn further develops the world economy generating a virtuous cycle. → The fall of trade barriers (tariff/non tariff) has encouraged and pushed the development of international trade.

Diffusion of technological innovation

• Communication - role of telecommunications technology (satellite, optical fiber, wireless) Internet - in processing increasing amount of information useful for individuals and firms
• Internet - half the world’s population uses the internet. Global e-commerce sales surpassed in 2 trillion dollars. The Internet can reduce some constrains of location, scale and time zones, by making it much easier for buyers and sellers to find each other, by allowing business to expand business
• Development in transportation technology - such as commercial jet travel, super freighters and containerization has shrunk the globe

Since the international shipping industry is responsible for carrying about 90% of the volume of world trade in goods, containerization has revolutionized the transportation business, lowering the costs of shipping goods over long distances and then helping the globalization of markets and production

Implications for global communications and transportation

Implications:

For Globalization market: low cost global communications networks and low cost transportation are helping create electronic global marketplaces.

The mass movement of people between countries, due to low cost jet travel, as well as the global communications networks and global media are reducing the cultural distance btw countries, favoring the creation of worldwide culture, and are bringing some convergence of consumer tastes and preferences. The consequence is the emergence of global markets for consumer products

For Globalization of production: The reduction of transportation costs and of costs of information processing and communication have made it possible for a firm to create and then manage a globally dispersed production system, then facilitating the globalization of production

Forces supporting and preventing global integration

How the process of globalization can be managed by an international business

How the process of globalization can be managed by an international business:

An international business in any firm that engages in international trade or invest.

Managing an international business is different from managing a domestic business. Why?

• Countries are different - in their cultures, political, economic and legal system, level of economic development. An international business manager has to be sensitive to these differences and to adopt the appropriate policies and strategies
• Problems are more complex
  • Which markets to enter and which to avoid
  • Which modes for entering a foreign country
  • Where to site production to minimize costs and maximize value added
  • How to coordinate and control dispersed production and export activities
• International trade and investment system are limited by government restrictions. An international business manager has to understand the rules governing the international business
• International transactions involve exchange rate movements. An international business manager must understand and develop policies for dealing with exchange rate movements

Some suggestion to firms deciding to go international:

• Monitoring the international environment
• Monitoring changes and factors of change
• Adopting strategies to live with the change

→ Companies, even big, can’t stop the change, they have to live in it.

Effects of the COVID-19 pandemic on global growth, international trade and FDI

• The Pandemic has gravely wounded the world economy with serious consequences. The spread of the pandemic has benefited from the underlying interconnectedness of globalization
• The unprecedented global shock caused by COVID-19 would have been unimaginable less than a year ago. The COVID-19 pandemic effects is causing a global economic decline that will be deeper and more widely than the great recession caused by the economic crisis in 2008-2009
• Moving rapidly across borders, COVID-19 is stimulating a number of trends already visible prior to the pandemic, amplifying some obstacles, but also opening new opportunities for trade and development
• The COVID-19 pandemic has gravely wounded the world economy with serious consequences. The spread of the pandemic has benefited from the underlying interconnectedness of globalization
• The unprecedented global shock caused by COVID-19 would have been unimaginable less than a year ago. The COVID-19 pandemic effect is causing a global economic decline that will be deeper and more widely than the great recession caused by the economic crisis in 2008-2009.
• Moving rapidly across borders, COVID-19 is stimulating a number of trends already visible prior to the pandemic, amplifying some obstacles, but also opening up new opportunities for trade and development
• As a consequence of the pandemic, the global economy (measured in gross domestic product) is expected to contract by around 4.3% in 2020

American countries - developed and not developed - negative output growth in 2020

• -5% US

European countries - significant negative growth 8%

• DE -5%
• IT -8%
• UK -10%

The international trade in goods declined in the first quarter of 2020, as the early effects of the pandemic. The prevision detected a much more dramatic decline in the second quarter (-18%). Based on preliminary data available, the prevision for the third quarter estimated a -5% for goods, signaling a potential recovery.

By comparing China, US and UE, significant declines are evident for US and UE, in particular automotive and chemicals industries. Differently, China experiments a less decline in almost all industries, and even a growth in some ones, such as textiles and office machinery, in particular.

FDI flows have fallen dramatically - The COVID-19 pandemic has had an immediate and negative impact of FDI in 2020, since the first lockdown. Global FDI flows are forecast to decrease by up to 40% in 2020; it is expected to decrease in 2021 and only began to recover in 2022. This trend is due to the delayed implementation of investment projects and to the deferring of new projects.

At the countries level, developed economies experienced the biggest fall, a decline of 75%. Differently, FDI flows to developing economies decreased by only 16% - less than expected. Flows were 28% lower in Africa, 25% in Latin American and the Caribbean and only 12% in Asia, mainly due to the resident investment in China. They also fell dramatically by 81% among economies in transition due to the rapid decline of flows to the Russian Federation, the largest of these economies

The decline concerns all major forms of FDI - the number and the value of the announced greenfield FDI projects (an indicator of future FDI trends) both dropped by 37% in the first 8 months of 2020.

Why this difference?. The greenfield investment are more frequently realized in developing countries far from developed economies. → During COVID-19, this project related to the establishment of new unit in developing countries has been stopped, so among the developing countries are declining more because these countries more in global value chain - delocalization of production from firms located in developed countries.

The number of cross-border mergers and acquisitions dropped by 15 per cent in the rest three quarters of 2020, compared with the previous year. In developed economies, where they are a significant part of total FDI, they fell by 21 per cent. In developing economies, their value rose by 12 per cent as the sharp decrease in Africa (-44 per cent) and Latin America and the Caribbean (-73 per cent) was more than offset by a 60 per cent increase in Asia. The number of cross-border mergers and acquisitions also rose (by 84 per cent) in transition economies, but from a very low base, and rejecting mostly corporate restructurings.

For all forms of cross-border investment, projections for 2020 and beyond remain laden with uncertainty. In terms of FDI owns, with a second wave of the pandemic undermining efforts