International Business - Managing Business in Globalization Era

 

Managing Business in Globalization Era

            Globalization refers to the integration of markets in the global economy, leading to the interconnectedness of national economies through global networks of trade, capital flows, and the rapid spread if technology and global media. Globalization has been accompanied by the creation of new institutions to work across borders and has led to renewed attention to long established international inter-governmental institutions: the UNO, the ILO and the WHO

Characteristics of Globalization:

1.    Greater trade in goods and services between nations

2.    Transfer of capital

3.    Development of global brands

4.    Spatial Division of Labor

5.    High level of labor migration

6.    Increase in spending on investment, infrastructure and innovation across the world

International Business:

            Globalization makes the business increasingly global even for domestic firms. National economies are becoming more and more interdependent and integrated and the world economy and business are becoming more and more globalized, driven by the economic liberalizations. International business refers to buying and selling of the goods and services across the borders. It encompasses activities of different nature such as trading, manufacturing and marketing, sourcing and marketing, production and so on.  

Drivers and Restrainers of Globalization:

            The main factors which motivate firms to go international are classified as push and pull factors. Pull factors are those forces of attraction which pull the business to the foreign markets such as relative profitability and growth prospects. Push factors refers to the compulsions of the domestic market such as saturation of the market. The important forces that drive globalization are as follows:

• Liberalization and Privatization which leads to the surge in cross border mergers and acquisitions and foreign direct investments resulting in a greater global economic integration
• Multinational companies that link their resources and objectives with world market
• Technological breakthroughs have facilitated in fostering business through reduced transportation and communication costs
• The proliferation of regional integration schemes enhanced the trade between the nations with increased cross-border investments and financial flows
• Economies of scale and knowledge transfers with proper utilization of resource among nations drives company towards exploring an opportunity in global market

            Besides these forces, government policies and controls, social and political opposition against foreign business, factors within organization that restricts globalization, restrain the globalization.

The special problems in International Business are as follows:

• Political and legal differences
• Cultural differences
• Economic differences
•  Differences in the currency unit and language
• Differences in the marketing infrastructure
• Trade and investment restriction
•  High costs of distance
•  Differences in business practices

Internationalization stages:

Basically, a company goes into the following stages on its decision to go global:

• Purely Domestic Company
• Domestic Company with some foreign business
•  International business
• Multinational/Global Company
• Transnational Company

Modes of Entry in International Business:

1.    Exporting Modes: The process of selling goods and services produces in one country to another country either directly or indirectly or through intra-corporate transfers. Strategies such as increasing the average unit value realization, increasing the quantity of exports, exporting new products result in increase of export earnings.

2.    Contractual Modes: Contractual entry modes are found in case of intangible products such as technology, patents, copyrights and so on. These modes can be categorized as follows:

v Licensing: A firm in one country (the licensor) permits a firm in another country (the licensee) to use its intellectual property. The monetary benefit to the licensor is the royalty or fees which the licensee pays.

v Franchising: A form of licensing in which a parent company (the franchiser) grants another independent entity (the franchisee) the right (name, production and marketing technology) to do business in a prescribed manner.

v Contract Manufacturing: A company doing international marketing contracts with firms in foreign countries to manufacture or assemble the products while retaining the responsibility of marketing the product.

v Management Contracting: The supplier brings together the package of skills that will provide an integrated service to the client without incurring the risk and benefit of ownership.

v Turnkey Contracts: An agreement by the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyer’s personnel who will be trained by the seller.

3.    Fully Owned Manufacturing Facilities: Companies with long term interest in the foreign market invest in owning a manufacturing facility which comes with advantage of complete control over production and costing associated with the risk of technological and human resources and production bottlenecks.

4.    Foreign Direct Investments: It refers to direct investment in a production unit in a foreign country.

v Greenfield investments – Venturing into a new product with new operational facilities.

v Brownfield investments – Investing in an existing facility to start its operations in the foreign country.

5.    Mergers and Acquisitions: These are defined as consolidation of companies either by combining two companies or acquiring of one company by another which are either hostile or friendly. These are of horizontal, vertical and conglomerate types done by either stock or asset purchase. The reason behind Mergers and Acquisitions are reaping of synergistic advantage, overnight growth of organization, risk immunization, tax savings, diversification and so on.

6.    Joint Venture: An entity formed between the two or more parties to perform the economic activity together. The parties work on creating a new entity to share in the revenues, expenses and control of the enterprise.

7.    Strategic Alliance: This enables companies to increase resource productivity and profitability by avoiding unnecessary fragmentation of resources and duplication of investment that seeks to enhance the long-term advantage of the firm by forming alliance with its competitors, existing or potential in critical areas, instead of competing with each other. This is particularly important for technology acquisition and overseas marketing

          The choice of the most suitable alternative is based on the relevant factors related to the company and the foreign market. A company may or may not use the same strategy for all the foreign markets or for all the products. There are some conditions to be satisfied on the part of the domestic economy and the government as well as the forms for successful globalization of the business which includes business freedom, required facilities, government support and global orientation of strategies. The intent of globalization is efficiency improvement and market optimization taking advantages of the global environment.