Global business environment

1- 1 Principles of Economics Spring 2014 Global Business Environment 1 1- 2 Global Business Environment The global business environment – the environment in different sovereign countries, with factors exogenous to the home environment of the organization, influencing decision making on resource use and capabilities. The external environment vs. the internal environment – The external environment includes the social, political, economic, regulatory, tax, cultural, legal, and technological environments. 1- 3 Global Business Environment To function effectively and efficiently, firms operating internationally must understand the social environment of the host country they are operating in. 1- 4 Global Business Environment Forces outside the firm’s traditional boundaries are increasingly important in determining the firm’s success. These forces in “the environment of business” differ among nations and over time  requiring modifications in strategies and management practices. 4 1- 5 Four Sets of Forces 1. Social Forces: – Subject of ethical codes and CSR strategies – A major force underlying the CSR challenges in international business is the difference in culture among countries. – Hofstede and Bond (1988) conclude that each country’s culture can be best examined in accordance with five dimensions: individualism/collectivism, uncertainty avoidance, power distance, masculinity/femininity, and long-term versus short- term orientation. 5 1- 6 Four Sets of Forces – In China, the pervasive importance of guanxi demonstrates the benefits that MNEs derive from developing ongoing and long-term exchanges of favors that link individuals, as well as the organizations in which they work. – Personal relationships that involve an ongoing exchange of favors may be criticized as petty corruption that can pervade all types of business transactions, both between firms and also with government employees. – While some of this bribery can simply expedite decisions and actions, other situations may involve a distortion of business outcomes. 6 1- 7 Four Sets of Forces 2. Technological Forces: – The technological environment comprises factors related to the materials and machines used in manufacturing goods and services. – Each nation, and each region within each nation, has its own unique innovation system that forms a key component of the environment of business. – The reality rests to a large degree on culture, social capital, education, and entrepreneurship. – Biotech, Global warming, green energy, etc. 7 1- 8 Four Sets of Forces 3. Economic Forces: – Economic forces differ among nations and continually change over time. – Economic factors exert huge impacts on firms working in an international business environment. – The economic environment relates to all the factors that contribute to a country's attractiveness for foreign businesses, such as monetary systems and macroeconomic variables (growth rates, unemployment and inflation rates, and foreign exchange rates) 8 1- 9 Four Sets of Forces 4. Political and Governmental Forces: – Political and governmental forces are related to each of social, technological, and economic forces. – These forces play a key role in the building of social capital, the fostering of entrepreneurship, and the facilitation of immigration. – The political environment in a country influences the legislation and government rules and regulations under which a foreign firm operates. 9 1- 10 Post Global Financial Crisis Int’l Business Strategy Orr (2010) Did the international strategies of global business change in response to the GFC? – 1. global businesses based in home countries which experienced a deep recession – 2. global businesses based in home countries which did experience recession, but had strong financial and capital markets leading to rapid recovery – 3. global businesses based in home countries which did not experience recession 10 [...]...Post Global Financial Crisis Int’l Business Strategy 1- 11 Economic theory predicts a reduction in internalization when the cost of capital is higher, as experienced in the recent global financial crisis (Ricardo 1963) – This prediction has been supported by a global reduction in foreign direct investment (FDI) of 30 % (UNCTAD, 2009) 11 Post Global Financial Crisis Int’l Business Strategy... response to demands from international businesses based in developed countries (Sharpe, 1997) 13 1- 13 Post Global Financial Crisis Int’l Business Strategy  Focusing on core activities also has the effect of directing an organization’s strategies away from diversification – Internalization is a form of geographical diversification – Even companies producing global products and services (such as airlines... necessary to sustain the business was a large barrier to internalization for companies based in home countries recently recovered from a recession (Birkinshaw and Morrison, 1995).14 1- 14 Post Global Financial Crisis Int’l Business Strategy 1 Deeply entered a recession – Iceland, Japan Iceland: banking industry – FDI has been substantial  the objectives of increasing economies of scale to globally competitive... country governments’ initiatives will be focused on domestic business development, reducing the effective home country government’s support for internationalization 18 1- 18 Post Global Financial Crisis Int’l Business Strategy 2 Briefly entered a recession – Australia, Singapore – As a result of the relative stability of their home country environment, exchange rate instability and the reduction in... intervention has made the home country markets more attractive and has caused international businesses to switch some of their development investment to their home country market rather than to foreign markets 19 1- 19 Post Global Financial Crisis Int’l Business Strategy 2 Briefly entered a recession (cont’) – International businesses with home markets such as Australia, which are located in geographical regions... capital available to local companies with which to compete against an international business acquiring local businesses – Porter's Five Forces and national competitive advantage theories do not predict this international strategy behavior of acquisition of companies in weak 25 foreign markets Post Global Financial Crisis Int’l Business Strategy 1- 26 Conclusion – Two principal factors are dominant in determining... industry (Country Monitor, 2009a) 15 1- 15 Post Global Financial Crisis Int’l Business Strategy 1 Deeply entered a recession (cont’) Japan: Toyota – Profitability was badly affected by the GFC  a fall from record profits to record losses over 12 months – Toyota's Japanese operations were dependent on its export market and attractive exchange rates – In reaction to global currency fluctuations, the lower... access to oil and gas assets (King 2009) 23 1- 23 Post Global Financial Crisis Int’l Business Strategy India: Tata – Tata Motors took advantage of the weakness of competitors whose home country markets were in recession and acquired the UK Jaguar Land Rover company – a net profit of US$300 million and an increase in revenue of 25%, indicating that business activity remains strong in its home country... which have not experienced a deep recession (EmergingMarketsNOW 2009b) 24 1- 24 Post Global Financial Crisis Int’l Business Strategy 1- 25 Implications – Exchange rate theory: The weakening of the exchange rates in countries which have experienced a recession, relative to the home country currency of the international business, makes companies in those home country markets attractive acquisition targets... post-recession global business response – This was primarily achieved by flattening hierarchies and outsourcing operations to lower-cost countries – Outsourcing has became much more attractive as low labor cost countries develop their technical and resource capacity to provide activities such as IT, accounting, basic manufacturing and call center work in response to demands from international businesses . Global Business Environment 1 1- 2 Global Business Environment The global business environment – the environment in different sovereign countries, with factors exogenous to the home environment. international strategies of global business change in response to the GFC? – 1. global businesses based in home countries which experienced a deep recession – 2. global businesses based in home. external environment vs. the internal environment – The external environment includes the social, political, economic, regulatory, tax, cultural, legal, and technological environments. 1- 3 Global