Lecture 1 Introduction: Lecture 1 Introduction This Course Structure Concepts Background History of International Business Trade and Investment Why Geography Matters Market seeking and Resource seeking transactions Current Dominant Factors World Class Operations Reductions in Trade Barriers Globally Connected Supply Chains Break Globalization and Employment Trade in Goods and Labor International Operations (MGMT 6390) / International Business (MGMT 6350)


What This International Operations/ International Business Course is About: What This International Operations/ International Business Course is About Business Strategy, Marketing What products and services to offer our customers Finance Investments, Currency transactions, etc. Operations Actually creating and delivering those products and services International Transactions For customers For input resources For service and production locations For knowledge For funding Business


International Transactions: International Transactions Trade Goods Services Foreign Direct Investment (and other investment) Mergers and Acquisitions Joint Ventures Green Field Development Technology Transfer Licensing Knowledge Diffusion R&D Services Supply Chain Relationships Suppliers Sales channels Facilitating Infrastructure International Transportation Links International Communication Links


Course Objectives: Course Objectives Gain a conceptual framework to: integrate and adapt superior operating practices and technologies from across the world for high performance operations. design global supply chains and manage risks of cross border business relationships establish world class manufacturing, service and R&D in developing countries assess globalization political and societal issues apply international business concepts to real business situations Critical skills for successful careers in Large global companies In the developed and developing world Small companies that buy, sell, and learn globally New ventures Government and Academia


Course Structure: Course Structure General principles History and key concepts, productivity and facility location Global Supply chains and logistics High performance operations practices Examples from specific countries US and Japan, Mexico, India, China, EU Examples from specific firms and industries Albany International, Color Kinetics, Semiconductors, R&D Services Strategic and Political Implications


Course Plan: Course Plan


Cross Cutting Ideas: Cross Cutting Ideas Tension (balance) between Transplantation vs Transformation of business practices and company culture when establishing operations in different national environments National mindset vs Global Brains Market vs Resource Drivers Deals and Partnerships Managing alliances and agreements Knowledge Diffusion Diverse Supply Chain Structures Modularization of production Toyota in India Example


Course Requirements: Course Requirements Readings – Library On-Line Reserves and Case Packs Participate in discussion boards in advance Essay Analyze an article or do more depth on one of the readings. 5-10 pages Project Strong preference: Work to solve a real problem with a company you or a team-mate have some access to Grading Participation = 30% (discussion board and in-class contributions ) Essay = 30% Project = 40%


Instructor Introductions: Instructor Introductions Richard Alben Susan Sanderson


Student Contributions: Student Contributions Fill out a survey on your International Business experience Were you born and or educated outside the US? Did you do business internationally? Examples: Owned a business in Thailand that imported parts from China and exported to Japan Worked in a US company that exports to Europe Working as a waiter in a café in Paris Do you know people in the US or in countries outside the US who have interesting points of view on International Business?


Course Limitations: Course Limitations US viewpoint Professors come from US background. Hard to break out of US-centric view of what is happening in the rest of the world Leaves out important areas of the world Little on EU, the Former Soviet Union and the least developed countries Only cover a few industries in any depth Appliances, Automobiles, Paper Machine supplies, Semiconductors, Flat Panel Displays, R&D services covered Financial services, health care, petroleum, government services etc, not covered Your challenge: Expand the concepts in the course to cover the gaps.


History of International Business: History of International Business Trade from ancient times until the late 1800’s From the late 1800’s to before WWII Dominance of the US (to 1970) Globalization: Japan, the Asian Tigers, the EU and China


History of International Business: History of International Business Trade from ancient times until the late 1800’s From the late 1800’s to before WWII Dominance of the US (to 1970) Globalization: Japan, the Asian Tigers, the EU and China


Growth of Trade: Growth of Trade WTO and IMF and World Bank data Intra-EU trade in 2000 was 1.4T in 2000 Services was 20%, Merchandise was 80% in 2000 2004 data from a different series


Growth of Foreign Direct Investment: Growth of Foreign Direct Investment UNCTAD data


Globalization of Business Practices: Globalization of Business Practices Linked to globalization of companies National companies with overseas operations Multinational companies Global companies With “global brains” But with national base World businesses(?) Diverse national cultures Global company culture Uniform home country culture


Why Does Geography Matter?: Why Does Geography Matter? Resource availability varies with geographic location Mineral resources (oil, coal, gold, iron ore) Hydroelectric power Growing conditions (weather, soil) Land Labor – High skills, low cost Infrastructure/clusters Social institutions, business ethics Ability to serve customers varies with distance Transportation/communication costs Hair cuts Repair services “Just in time” components R&D for culture-dependent products and services Government incentives/disincentives


Market Seeking vs Resource Seeking International Operations: Market Seeking vs Resource Seeking International Operations Examples “Clear” cases Banana production in Nicaragua Refrigerator Assembly in Mexico (vs the US) GE Aircraft Engines joint venture with SNECMA Toyota plant in Georgetown KY Mixed cases Motorola Cell Phone production in China Medical Equipment R&D in India Note: Travel Services in Puhket Thailand, Oil field services in Saudi Arabia Refrigerator Assembly in Mexico (vs China) Implications Reduction of transportation, communication, regulation and worker skill barriers favors resource seeking vs market seeking A factor driving trade growth, but not necessarily FDI growth


Dominate Factors Today: Dominate Factors Today World Class Operations Reductions of Trade and Investment Barriers Globally Connected Supply Chains


Operations Foundations of Globalization: Operations Foundations of Globalization Changes at the level of operations drove much of globalization International transaction costs driven down Production technology needs to compete with “best-in-world” Innovations in Information and Communication and Transportation drive down transaction costs Port Automation, Inter-modal shipping technology Internet Global Supply chains Information enabled services Innovations in Production technology and Management Total quality management and its relatives Adaptation for specific products and company cultures High performance and technology emerge in the developing world


Trade and Investment Barriers: Trade and Investment Barriers Tariffs In past, were a major source of revenue to governments A major impediment to trade Non-tariff issues Trade agreements - WTO


Tariffs: Tariffs Past Major source of revenue to governments Raised prices of imported good by 20% - 100%+ Present for US $20B/yr to US government on $1T in imports (2000) Average of 2% of import value (wholesale) “Most Favored Nation,” “Normal Trade Relation” rates: Consumer electronics - 3.9%, Machine tools - 7% Some agricultural goods and Clothing - ~25% Countries with Trade agreements Many rates are 0% Less developed world High tariffs remain Protection Revenue


Other Barriers: Other Barriers Quotas (Tariff Rate Quota) Textile (Multi-fiber agreement) example Trigger Prices Local Content Requirements Off-sets Technical standards, health and safety Can be used as screen for protectionism National security Weapons and Dual Use Technologies Local business ownership requirements


World Trade Organization: World Trade Organization Established in 1995 after the Uruguay Round of trade negations Successor to GATT Administers WTO trade agreements, forum for trade negotiations and for resolving trade disputes Principles without discrimination — a country should not discriminate between its trading partners (giving them equally “most-favored-nation” or MFN status); and it should not discriminate between its own and foreign products, services or nationals (giving them “national treatment”); freer — barriers coming down through negotiation; predictable — foreign companies, investors and governments should be confident that trade barriers (including tariffs and non-tariff barriers) should not be raised arbitrarily; tariff rates and market-opening commitments are “bound” in the WTO; more competitive — discouraging “unfair” practices such as export subsidies and dumping products at below cost to gain market share; more beneficial for less developed countries — giving them more time to adjust, greater flexibility, and special privileges.


International Agreements on Bribery: International Agreements on Bribery US Foreign Corrupt Practices Act (FPCA) No payments by US companies to foreign officials for the purpose of obtaining business (1977) Can’t avoid it by using subsidiaries or intermediaries Can get hit with treble damages from companies that lose business because of our bribe Exceptions Facilitating payments Where provably legal in the foreign country Changed the game for US companies Extended to most firms from other developed countries (1998) OECD Convention (ratified by 33 countries) US FPCA extended to apply to almost any firm doing business in the US


A Global Supply Chain : A Global Supply Chain Fiber supplier in Australia Textile Maker in Italy Zipper Maker in China Apparel Maker in Mauritius Apparel Designer and Marketer in US Carriers and Intermediaries Carriers and Intermediaries Retailer in US Question: How best to command a supply chain? Arms length transaction at every stage? Global coordination – vertical integration? Use of Intermediaries Laura Ashley – Federal Express Case: Logistics Outsourcing Next time - Li and Fung Case: Supply Chain Outsourcing Material flow Information flow Implies transport system details omitted


Trade in Goods and Labor: Trade in Goods and Labor


Trade in Beavers and Knives: Trade in Beavers and Knives Europe 1 beaver = 3 knives North American Wilderness 3 beavers = 1 knife Start Finish


Knife-Beaver Trade issues: Knife-Beaver Trade issues Transaction costs Distribution of Benefits Dynamics exchange ratio equilibration cost pressures on facilitating factors technology and market changes


“Trade” in Labor: “Trade” in Labor US 1 labor hour = $22 China 1 labor hour = $0.60 Start Finish $ $$$$$ $ Unemployed worker Unemployed worker $$$$


Labor Trade issues: Labor Trade issues Restriction on movement of people Differences in productivity declining Requires Knowledge transfer Increasing disparity between “footloose” and “rooted” jobs Equilibration of wages between countries Increasing income disparity within countries Pain, but economic benefit to developed country GDP “Creative Destruction,” Like Productivity Mainline opinion: major net positive effect for developing country


Median Salaries ($K/year) In IT – India vs. US*: Median Salaries ($K/year) In IT – India vs. US* *India results from PayScale 2005 India IT wages up 14.5% vs 3% in US 2004


Professional Wages: Professional Wages Business Week - Dec. 2005


Measure of Income Disparity: Measure of Income Disparity % Households % GNI of lowest x% of households 0 100 100 0 Gini Coefficients: a = 0, b~0.4, c~0.6 a b c


Increasing Income Disparity in the US: Increasing Income Disparity in the US From “Income Inequality in the United States” By Steven C. Deller* URL: http://www.aae.wisc.edu/www/pub/cenews/ce308figures.pdf


Global R&D Resources I: Total Science and Engineering Doctorates in Selected Asian Economies: Global R&D Resources I: Total Science and Engineering Doctorates in Selected Asian Economies NSF Science Indicators – 2004 appendix table 2-39


Global R&D Resources II: Total Science and Engineering Doctorates including US and Germany: Global R&D Resources II: Total Science and Engineering Doctorates including US and Germany NSF Science Indicators – 2004 appendix table 2-39 and 2-37


Next Class: Next Class Global Supply Chains Readings: “Modular production networks: a new American model of industrial organization,” by Timothy Sturgeon Guest speaker: Tim Sturgeon Case: Li and Fung


Guidance for Case Discussion: Guidance for Case Discussion Li and Fung Two major themes How Li and Fung developed into a world class player in providing supply chain services Technology advance requires that the company adapt. But how to adapt new information technologies in a way that provides value in both cost and enhanced service is an issue Some discussion points What were the historic strengths that enabled Li and Fung’s business to grow? What was the value they delivered? What keeps an intermediary like Li and Fung from being squeezed between suppliers and retailers? How is Li and Fung trying to adapt to advancing information technology? What advice would you give William Fung? Assignment Prepare notes to hand in