International Management for East Asia

International Management for East Asia

a.a.2019/2020

Università Ca Foscari di Venezia

Corso di laurea magistrale in Lingue, economie e

istituzioni dell’Asia e dell’Africa mediterranea

Curriculum Language and Management to China

International business: the study of transactions taking place across national borders (that

involve economic actors based in different countries) for the purpose of satisfying the needs of

individuals and organizations. All transactions that involve two different geographical context

Nowadays any business has some aspect of internationality, even if consumers are only domestic

Many forms of international business transactions:

International trade (exporting and importing): the exchange of goods and services across

international borders. It has been the driving force of economic growth. A product or a service

that is generally in one country can be sold/purchased in a different country.

Transaction: exchange of goods or service between two parties

Global export: from 4 trillion US dollars in 1990 to 23 trillion US dollars in 2014.

International companies (multinational companies): companies that engage in value-added

activities in different locations, whose international operations (affiliates or subsidiaries) are

actively coordinated by one or more headquarters. Companies which operations are spread

beyond the national boundaries of their own country (for example to gain access to raw materials

at a lower cost). Multinational enterprises (MNEs), they are usually defined as companies that

have operations outside its own country through subsidiaries, part of its organization is located in

a foreign country, they are responsible for about one third of global trade, much of which moves

between affiliates (internal). They are able to orchestrate their global supply chain taking

advantage of the specific inputs that are available at the best conditions in different countries

[American firm that has operations in Mexico and Brazil, the company sources the most efficient

inputs in the other countries and then organizes an internal market, within the company]

Arbitrage: you are able to take advantage of the best opportunities in different context and

rebalance these opportunities within the organization

Different parts if a supply chain are spread in different countries, there are international

transactions within the same company

In the last few years technology has enabled company to manage their business abroad without

establishing operations abroad.

Globalization: economic globalization is a process involving the growing interdependence of

locations and economic actors across countries and regions. It is an ongoing phenomenon.

Shorter distance, standardization, cooperation, internationalization

Global or international division of labour: each country specializes in the activity that they perform

better given the amount of resources that they are endowed with.

Thanks to globalization any country plays a role in international transactions, any country can

participate in international business transactions.

A company involved in international business transactions can be exposed to threats, also

reputation threats, because you are not able to control everything [Ikea used a supplier in India

whose entire business model was on using child labour to produce textiles for carpets].

Consequences of globalization:

- Increasing interdependence of locations: cross-border migration, blending of cultures, more

homogeneous consumption patterns, global value chains connect local clusters,

standardization of various kinds, cooperation in supranational institutions

- Increasing interdependence of firms: more joint ventures, alliances and M&A, growing cross-

border competition for markets, resources and expertise, shared agenda set by governance

institutions

- Increasing interdependence of people across the globe

[Brexit is taking several years because the European Union’s countries are highly interdependent,

this means that the web of international business transactions involving countries and actors is

very big and it is not easy to take one part of the system and bring it outside, it affects all the

system] Stability is important to make sure that international business transactions are successful

Kia -> Korean car, the CD player is supplied by Panasonic (Japanese), Panasonic produce some

components in China, components are shipped to Mexico for final assembly, they are moved to

the US from where the CD player is moved to Korea for final assembly on the car

The CD player that has been moved between different countries is cheaper than a CD player

made in one specific country

Driving forces of globalization:

- Technology and innovation: more powerful and affordable technology has promoted fast, easy

worldwide communication and improved production capabilities enabling organizations to operate

more effectively in the international marketplace.

Which technologies? Transportation and communication

Examples: speed up interactions, enhance managers’ ability to oversee foreign operations, even

very small companies can reach global customers and suppliers.

Innovation has lead to the emergence of the knowledge-intensive, multi-technology firm (they

have to go abroad to find the different technology and knowledge that they need).

- Socio-political developments: international business transactions can occur if the countries

involved enable these exchanges. Economic integration and the existence of trade blocks is

important to ensure convenient and efficient international business transactions. In trade blocks

we are able to avoid tariffs on products that are developed in another country and are cheaper

than domestic products. Political events influence economic interdependence (for example, the

collapse of Communism in Russia and Eastern Europe in the late 1980s).

Stability of policies, a legal system that protects you and the creation and maintenance of an

appropriate environment are necessary for firms to prosper. Entrepreneurs need to be able to

claim ad defend their property rights, they need to be able to establish contracts that are legally

enforceable, and to be able to do so at a reasonable cost and within a reasonable timeframe.

The role of institutions: “Set of common habits, routines, established practices, rules or laws

that regulate the interaction between individuals and groups”. The invisible glue that holds

economic actors together.

- Formal: rules that can be of the form of legal codes and laws (responsibilities, job descriptions,

codes of conduct and accounting and financial regulations) [international agreements]

- Informal: are not always laid out in the form of written instruction but come out of usage and

tradition and are often unwritten and tacit [kissing on the right cheek first in Italy]

Supranational agreements:

GATT (General Agreement for Trade and Tariffs): established in 1947 to liberalize trade and to

negotiate trade concessions among member countries. It formalized the commitment of countries

to develop a free market. Today the WTO is enforcing the provisions of the GATT.

TRIPS: agreements on trade-related aspects of intellectual property rights

WTO: established on January 1,1995. An international organization that deals with the rules of

trade among member countries. Enforces the provisions of the General Agreement on Tariffs and

Trade (GATT). Acts as a dispute-settlement mechanism.

Economic integration: the EU formed in 1957 is the single largest and more comprehensive

regional integration scheme. The collective GDP of the EU is greater than that of the United States

and Japan. The EU is the world’s largest importer and exporter, a large portion of EU exports is in

the form of intra-EU trade.

There are more than a hundred of regional integration schemes in existence:

- NAFTA: North American Free Trade Agreement (1994)

- Mercosur: free trade area in Latin America inaugurated by Brazil, Paraguay, Uruguay, Argentina

(1995)

- ASEAN: Association of Southeast Asian Nations

Trade blocks in which the products of each individual country can circulate freely in a market

without tariffs and quotas.

- Companies: globalization is driven by the dynamics and relationships between companies that

want to go abroad for search for economic inputs and companies that go abroad to sell their

outputs.

Companies decide to internationalize in terms of inputs to achieve inputs that are cheaper and to

expand the potential market for their products.

In order to do so, they rely on small and medium size enterprises. The world of international

business is based on bigger multinational companies (MNEs) whose activities are spread across

countries but also on small and medium size enterprises (SMEs) that support their activity.

Multinational firms are big, when companies become bigger they loose their flexibility and the

capacity to react promptly to what the market wants, small and medium size enterprises are really

flexible, they are able to change. Multinational firms rely on a network of collaborators that help

help them to maintain their flexibility. Multinationals entertain a number of relationships with local

firms that are able to allow them to gain access to resources, consumers, technology...

MNEs & SMEs

MNEs often purchase from SMEs. This is because their specialized workforce’s, innovation and

technology allow SMEs to provide goods and services more efficiently than if the MNE were to

source these internally.

MNEs often purchase from SMEs. This is because their specialized workforces, innovation and

technology allow SMEs to provide goods and services more efficiently than if the MNE were to

source these internally.

SMEs are invaluable partners to larger firms because they can change direction, focus and

structure with relative ease.

One of the major competitive advantages SMEs have over larger firms is their flexibility.

SMEs overcome their biggest disadvantage - limited resources - by the skillful use of alliances.

Every company has a value chain, a set of activities that this company carries out in order to

develop its own products, these activities are primary activities (logistics, operations, marketing

and sales, service) and secondary activities (Human Resources management, technology

development, procurement, infrastructure). Michael Porter -> Value chain model: activities that are

developed within the boundaries of every individual company. In international business these

activities are not only not performed by the same company but they are also performed in many

organizations abroad. Today the activities of the value chain are performed by different companies

in different countries. We moved from a model of value chain to a model of global value chain.

We are not really globalized because a significant part of the world lacks the resources to

establish advanced connections with the rest of the world.

The amount of trade that takes place between countries that are 5000 miles apart is only 20% of

the amount that would be predicted to take place if the same countries were 1000 miles apart.

A company is likely to trade 10 times as much with a country that is a former colony, for instance,

than with a country to which it has no such historical ties.

A common currency increases trade by 340%.

The world is not fully globalized, there are a number of arrangement that we didn’t use in order to

make countries closer, the world is not homogeneous, there are still some elements of proximity

that matters a lot.

In the past there has been a lot of hype around the idea that globalization could allow companies

to e successful in every market but today we understand that it is not possible because of culture,

there are some traits of cultural distance that are too difficult to overcome and change.

We need to accept them and take them into account.

CAGE framework (Ghemawat)

Distance still matters so the world is not flat, distance that separates two countries is a

multidimensional concept (4 dimensions), different dimensions of distance are likely to influence

different industries in different ways.

[Industry is a set of firms that have something in common, they satisfy the same consumer needs,

they share the same production method, they compete with each other, they share the same type

of supplier and distributors, they use the same technology. (Porter’s 5 forces model)

Core business: most important business area of a company.]

The 4 dimensions of distance: Cultural distance, Administrative and political distance,

Geographic distance, Economic distance.

- Cultural distance: distance that separate 2 countries in terms of values, how they

communicate and interact, it deals with the informal institutions, language (explicit and tacit

aspects), religion. Distance between 2 countries increases with: different languages, ethnicities,

religions, social norms and dispositions; lack of connective ethnic or social networks; lack of

trust and mutual respect. It mostly affects TV industry, food industry and wine industry.

- Administrative distance: differences that exist in terms of formal institutions, participation to a

trade block, sharing colonial and historical times, sharing rules and regulation in managing

business activities, political hostility. Distance between 2 countries increases with: absence of

trading bloc; absence of shared currency, monetary or political association; absence of colonial

ties; political hostilities; weak legal and financial institutions. It mostly affects industries that

deal with electricity, aerospace or telecommunications.

[India and Pakistan are very close but they do not trade with each other systematically because

they are not in a good relationship]

- Geographic distance: kilometers, sharing the same border, sharing the same time zone and

climate. Distance between 2 countries increases with: lack of common border, waterway

access, adequate transportation or communication links; physical remoteness; different

climates and time zones. It mostly affects cement industry, glass and meat industry or financial

services.

- Economic distance: how much consumers are able to spend, income per capita, the growth

rate, economic or business infrastructure (the financial market, the banking system, the stock

market, the logistic infrastructure, transportation, transparency of contractual relationship.

Differences between 2 countries increases with: different consumer incomes; different

costs and quality of natural, financial and Human Resources; different information or

knowledge. It mostly affects car industry or textiles industry.

Business model: the way a company makes money, how companies relate with their suppliers

and consumers, when there is economic distance we cannot export the same business model, it

should be adapted to the characteristic of the foreign market.

[Walmart in India, mistake: it was not considering the highly distance in terms of economic and

logistic infrastructure, it started to adapt its model to the Indian market]

Most of multinational firms are not global businesses in the sense of having markets across the

world. Instead most of them have the vast majority of their sales within their home leg of the triad

namely in North America, the European Union or Asia.

We are globalizing at a different speed

Overcoming distance has a cost -> Starbucks provided each consumer with a key chain to avoid

the barrier of communicating their choice

When starting to internationalize: do the CAGE analysis to understand the amount of distance

between the two countries and identify some tools to overcome the barriers, make sure to have

enough money to invest in the internationalization process

Multinationals can be global, local and regional (the lion share of their income is originated in their own region)

Even though the world has been globalizing, in reality in many parts of the world the trend is the

growth of intraregional trade rather than global trade, companies exchange more with companies

in the same macro region

The virtuous cycle of interrelated proximity dimensions: when countries start to be closer, a

virtuous cycle is instigated by which the 2 countries become more and more closer to each other

(reduction of administrative distance has an impact in economic distance, countries are exposed

to each other product as a result there is a reduction of cultural distance, government are pushed

to make the relationship between two countries smother and decrease the administrative

distance) [Italy and Spain, with the EU decreases the administrative distance, no tariffs, started to

trade more, this had an impact on economic distance]

Internationalization: why, where, when and how

Why do companies engage in international business?

Increase the revenue, the competition in the domestic market is high, the demand is not high

enough to pay back the costs

Supply -> cost

Demand -> revenue and market

Example: an oven is a fixed cost (cost that do not vary, can be spread across a greater amount of

products), sugar is a variable cost (vary with the number of products that you produce)

The fixed cost that you distribute with the production of products will make sure that your unit

cost will decrease

When you have a big fixed cost your activity is subject to “economy of scale”, your unit cost

tends to decrease the greater the amount of output you’re able to sell because you have fixed

cost that can be spread across a greater amount of output

Excess capacity: you produce more than the actual demand -> you bring your products abroad

Reasons for internationalize:

1) To expand sales: increasing opportunities through foreign markets, because of declining

domestic sales, because of saturated domestic markets, because of excess of capacity

2) To acquire resources: lower costs, new and better products, additional knowledge

3) To minimize risks: smoothing sales and profits, softening the impact of price swings or input

shortages in specific countries, preventing competitors from gaining advantages in national

markets where the firm already operates

4) To exploit proprietary assets: strong brands, technologies, capabilities, production

processes, any asset that has proven successful and creates a competitive advantage: a

situation in which the company has a systematically higher performance than its competitors,

it has resources and capabilities that are unique to that company

The In