Chapter 3 Participants in International Business

1. Chapter 3 Participants in International Business International Business: Strategy, Management, and the New Realities

2. Three Types of Participants in IB • The focal firm – initiator of IB transaction, including MNEs and SMEs • Distribution channel intermediary – specialist firm providing logistics and marketing services in the international supply chain • Facilitator – a firm providing special expertise in legal advice, banking, customs clearance, market research, and similar areas International Business: Strategy, Management, and the New Realities

6. The MNE as a Focal Firm • A Multinational Enterprise (MNE) is a large organization with a network of production plants, regional headquarters, and country subsidiaries in numerous countries. • Examples include: Nestlé, Sony, Unilever, Nokia, Ford, Citibank, ABB, and Shell Oil. • MNEs include those in retailing ( e.g., Carrefour and Gap) and services ( e.g., Citibank, Amazon). • Some MNEs in countries like China and Russia may be state owned. International Business: Strategy, Management, and the New Realities

7. The SME as a Focal Firm • A Small and Medium-Sized Enterprise (SME) is a relatively small player in its respective industry (in the U.S., those with less than 500 employees). • SMEs can be more flexible and quicker to respond to international opportunities. • Though their limited resources prevent them from engaging in FDI, SMEs can excel in exporting, licensing, and franchising. International Business: Strategy, Management, and the New Realities

8. The Born Global as a Focal Firm • A Born Global (BG) firm represents a relatively new breed of the SME that undertakes early and substantial internationalization. • Primarily a niche player, born globals display high degree of entrepreneurial orientation, proactiveness, and customer service. • In the contemporary era, born globals make up the fastest growing segment of exporters in most countries. International Business: Strategy, Management, and the New Realities

9. Some will exceed $100 million Manage transition issues early Niche limits Size Small domestic sales only Create international position Product or process development Begin exporting early (2 years) • Credibility • Finance • Export • Innovation… the next product • Finance • Foreign representation • Export know-how & skills • Market information Time Evolution of a Born Global Exporterand Challenges It Overcomes International Business: Strategy, Management, and the New Realities

10. Common Characteristics of Born Global Firms • Experience early, rapid, and substantial internationalization • Fewer financial and other resources than traditional exporters • Formed by technically inclined, market-oriented business people with entrepreneurial drive • Often enjoy internationally recognized technical eminence and universal appeal in given product category International Business: Strategy, Management, and the New Realities

11. Common Characteristics of Born Global Firms (2) • Emergence often associated with significant product/process breakthrough or innovation • Products often involve advanced technology, substantial added value, superior quality, and differentiated design • Internationalization typically via exporting and facilitated through network relationships • Heavy user of advanced IT and communications technologies International Business: Strategy, Management, and the New Realities

12. Distinctive Features of Born Global Marketing Strategy • Typically a specialist, niche player • Distinctive product/offering • High degree of product/service quality • Personal attention to building customer relationships • Constant effort to upgrade foreign distributor effectiveness International Business: Strategy, Management, and the New Realities

13. Globalization and Entrepreneurship The Stanford Technology Ventures Program Link: http://ecorner.stanford.edu/ International Business: Strategy, Management, and the New Realities

14. Foreign Market Entry Strategies of Focal Firms Cross-border business transactions can be grouped into three categories: • Trade: buying and selling of products • Contractual exchange of services or intangibles: buying and selling of services • Equity ownership in foreign operations: establishing foreign presence through direct investment International Business: Strategy, Management, and the New Realities

16. The Nature of Cross-Border Transactions • Trade (export and import) implies a home-based operation where independent partners in the foreign market are engaged to provide local services. • Contractual exchanges include licensing, franchising, service contracting, turnkey operations, and project-based partnerships. • Equity ownership is accomplished through FDI which can be implemented through acquisition or greenfield investment. International Business: Strategy, Management, and the New Realities

17. Examples of Focal Firms that are Involved in Contractual Exchanges Turnkey Contractor: Provide engineering, design, and architectural services in the construction of airports, hospitals, oil refineries, and other types of infrastructure. • These projects are typically awarded on the basis of open bidding by the sponsor. • Examples- European Channel Tunnel, the Three Gorges Dam in China, Delhi Metro Rail Ltd. and the Hong Kong Airport. • Build-own-transfer venture- an increasingly popular type of turnkey contract in the developing economies where contractors acquire an ownership in the facility for a period of time until it is turned over to the client. International Business: Strategy, Management, and the New Realities

18. International Collaborative Venture • In an international collaborative venture (ICV), partners pool their resources and share the cost and risks of the new venture. • Through an ICV, a focal firm can exploit partner’s complementary technologies and expertise, avoid trade barriers, connect with customers abroad, and configure value chains more effectively. • ICV represents the middle ground between FDI and exporting; the firm externalizes value adding activities such as R&D or manufacturing. International Business: Strategy, Management, and the New Realities

19. Two Types of International Collaborative Ventures • Joint Venture: the focal firm creates and jointly owns a new legal entity together with foreign partners • Project-Based Collaborative Venture: Focal firm collaborates with foreign partners on a project with a relatively narrow scope and a well-defined timetable, without creating a new legal entity. • Firms often form project-based ventures to share the cost and risks involved in knowledge-intensive R&D projects. International Business: Strategy, Management, and the New Realities

20. An Example of Joint Venture • Advantages: share costs and risks, gain access to needed resources, gain economies of scale, and pursue long-term strategic goals. • Hitachi formed a joint venture with MasterCard to promote a smart card system (Multos) for banking and other applications. • BP partnered with the state-controlled Hindustan Petroleum Corporation in India. The new venture built a $3 billion refinery in Punjab and established a joint marketing business, including a network of retail service stations around India. International Business: Strategy, Management, and the New Realities

21. An Example of Project-Based Collaboration Cisco Systems has expanded much of its operations through strategic alliances with key foreign players. • With Japan’s Fujitsu to jointly develop routers and switches that enable clients to build Internet protocol networks for advanced telecommunications. • In Italy, Cisco teamed with the telecommunications company Italtel to jointly develop network solutions for the convergence of voice, data, and video to meet growing global demands. • In China, Cisco formed an alliance with telecommunications company ZTE to tap the China and Asian markets. International Business: Strategy, Management, and the New Realities

22. Distribution Channel Intermediary • Agents, distributors, manufacturers’ reps • Specialize in physical distribution and marketing service; connect the focal firm with the end user in the foreign market. • Assist the focal firm by providing logistics services such as warehousing and customer support. • Especially critical to exporters who do not establish foreign presence themselves. • Are based either in the home country or the host country. International Business: Strategy, Management, and the New Realities

23. Export Management Company (EMC) • A more common intermediary in the U.S. is the Export Management Company which acts as an export agent on behalf of the focal firm. • An EMC finds export customers, negotiates terms of sale, and arranges for international shipping, typically for smaller exporters. • Most EMCs specialize in specific industries and geographic areas. International Business: Strategy, Management, and the New Realities

24. Online Intermediaries • Disintermediation – bypassing traditional intermediaries – is made possible due to widespread use of the Internet to reach customers globally. • Examples include Amazon, Dell, eBay, and Alibaba – English-language portal based in China that specializes in business-to-business exchanges. • Traditional retailers such as Sony and Tesco have also established online presence. • One negative outcome of online retailing has been the ease with which unscrupulous marketers reach on suspecting him customers with fake products (e.g., fake pharmaceuticals). International Business: Strategy, Management, and the New Realities

25. Facilitators in IB • Facilitators assist the focal firm with specialized services required in cross-border transactions. • Facilitators include: Banks, international trade lawyers, freight forwarders, customs brokers, consultants, ad agencies, and market researchers. International Business: Strategy, Management, and the New Realities