International Business

MIT Classification: Trusted 1. Apparel Industry 2. Computers, Office Equipment Industry RMIT Classification: Trusted 3. Household and Personal Products Industry 4. Internet Services and Retailing Industry RMIT Classification: Trusted 5. Pharmaceuticals Industry Global information economy Dr Joseph H. Kim School of Management RMIT University 1 1 Today’s lecture • Era of global information economy • Innovation and R&D • Implications for MNEs 2 2 Competing in the global information economy “We live in an information economy. The problem is that information’s usually impossible to get, at least in the right place, at the right time.” (Steve Jobs) 3 3 Global information economy • Industrial economy: productivity as source of competitinvess (e.g. division of labour, use of machinery, assembly lines etc) • GIE: “intangibles” such as information, innovation and creativity as both input and output • “The most important management in [GIE] is to manage intelligent workers.” (Peter Drucker) Industrial economy Information economy 4 4 Birth of Fordism: mass production in auto industry 5 5 Toyota Production System: “Automation with a human touch” (jidoka) 6 6 Software, Tesla’s competitiveness in auto industry? 7 7 “Smiling curve”: where value is created in GIE? 8 8 E-commerce in GIE • ICT impact on firms expanding into new markets • E-commerce: internet used as a transaction medium • Frequently refers to B2C, but also includes B2B and C2C • Overcoming the problems of distance and costs • Delivery of e-commerce services in foreign markets may be affected by IT infrastructure, logistics, cyber security and online payment services etc 9 9 Sharing economy in GIE • • • often referred to a “peer-to-peer” market an economic arrangement allowing people to collaboratively make use of underutilised assets (e.g. vehicles, bikes, houses, tools etc) through fee-based sharing using a digital platform intrinsically an international phenomenon 10 10 E-commerce & change in industry dynamics Porter’s Five Forces 11 11 Social media in GIE • Social media are interactive online communication technologies that facilitate the creation or sharing of information • Social media has become a critical part of MNE’s strategy – – • solicit opinions on new product development build relationships with both existing and potential customers create brand and product awareness customer support and education monitor and respond to consumer feedback Need locally responsive social media strategy 12 12 Innovation & R&D in GIE Where should MNEs locate their R&D activities? Innovation: Introduction and spread of new and improved products and processes in the economy R&D: Turning new knowledge and ideas into tangible products or processes 13 13 Samsung Electronics global R&D centres 14 14 Pfizer consolidating R&D sites 15 15 Measuring R&D intensity OECD (2022), Gross domestic spending on R&D indicator 16 16 Bloomberg Innovation Index 2021 17 17 Other indicators of innovation Patent activity: number of annual patent and grant filings High-tech density: volume of domestic, high-tech public companies and employees (e.g. aerospace, biotech, IT, renewable energy etc) Tertiary efficiency: total enrolment in higher education, the share of labour force with advanced education levels, and the share of STEM graduates and in the labour force etc 18 18 Innovation cluster • “a geographic concentration of business initiatives, suppliers and associated institutions in a particular field” (Michael Porter) • foster innovation and knowledge creation by bringing together educational and research institutions • knowledge spill-over driving innovation 19 19 Political Economy of Global Business Dr Joseph H. Kim School of Management RMIT University 1 1 Today’s lecture • • • Understanding political economy of global business Changes in business-government relationship Rise of populism 2 2 What is political economy? Why it matters in GB? • Political economy: interaction between political and economic systems • Understanding the impact of government decisions is businesses critical for MNEs • for assessing opportunities and risks; • formulating strategies 3 3 “Reshoring” to “Friend-shoring” Trump administration’s reshoring: Biden administration’s friend-shoring: “I’m going to get Apple to start making their computers and their iPhones on our land, not in China” “The idea [of friend-shoring] is for a group of countries with shared values to deploy policies encouraging companies to spread manufacturing within that group” (Donald Trump during his election campaign, 2016) (Washington Post, 2022) 4 4 Political economic decisions at global level “Global governance is governing, without sovereign authority, relationships that transcend national frontiers. Global governance is doing internationally what governments do at home“ (Frinkelstein, 1995, p. 369) “Global governance is … instance of governance in the absence of government” (Ruggie, 2014, p. 5) • Implies absence of central authority and the need for collaboration and cooperation among national governments • Backlash against political globalisation in recent years: as geopolitical landscape and political thinking change so do the role and impact of multilateral / regional institutions 5 5 Selected global and regional institutions and agreements Policy agenda Global Regional Trade WTO EU, NAFTA, ASEAN, Mercosur Monetary IMF EU (Eurozone), CFA franc Peace UN OSCE World Bank ADB, AfDB, EBRD, IDB Development finance Climate change Kyoto Agreement, Copenhagen Accord, Paris Accord Financial sector regulation Basel Committee 6 6 Australia’s free trade agreements (FTAs) 7 7 Role of national governments in GB • Political decisions by national governments based on sovereign rights • Key roles governments play include; o setting up, monitoring and managing an economic system – regulating and supporting business activities o encouraging FDI – tax incentives, improving infrastructure, removing administrative barriers o discouraging / limiting FDI – protecting local industries or key resources – maintaining political and economic independence – sanctions: e.g. sanction on Russia in the context of the Russia-Ukraine conflict o state capitalism: – government undertaking business activities (e.g. SOEs in oil industry) 8 8 State-owned oil companies 9 9 10 Changes in businessgovernment relationship 1930s – 1970s: Interventionism • Era of big government: Keynesianism and welfare state in the post WWII period 1980s – mid 2000s: Liberalism • “Small and efficient” government: rise of neoliberalism, NPM (new public management) and global integration 2008 – present: Back to interventionism • “Small and strong” government vs “big and strong” government?: GFC, COVID-19 and the rise of populism 10 10 11 What is populism? • An ideology which pits a virtuous and homogenous people against a set of elites and dangerous ‘others’ who are together depicted as depriving (or attempting to deprive) the sovereign people of their rights, values, prosperity, identity and voice. Albertazzi & McDonnell (2008) • “[Brexit]…a victory for real people, a victory for ordinary people, a victory for decent people. We have fought against the multinationals, we have fought against the big merchant banks, we have fought against big politics, we have fought against lies, corruption and deceit.” Nigel Farage, leader of Brexit Party 11 11 https://www.statista.com/chart/16180/europeans-livingunder-governments-with-at-least-one-populist-in-cabinet/ 12 12 13 Causes and consequences of populism • Causes? • Economic crisis and social inequality • Backlash against hyper-globalisation and pluralism • Consequences • Anti-trade & anti-immigrationContact details policies • Uncertainty for businesses 13 13 14 14 15 Implications for MNEs? • Current business environment presents novel challenge to the way businesses engage with politics • Market strategies are no longer enough: MNEs need non-market strategies to work with social and political imperatives – “Public policy is no longer a spectator sport for business.” (Murray Weidenbaum, 1980) – Corporate political activities: “corporate attempts to shape government policy in ways favourable to the firm” (Hillman et al., 2004) – E.g. lobbying, coalition formation, communication with governments and the wider public etc 15 15 Week 6 Stakeholders in IB and responsible management of MNES Dr Joseph H. Kim School of Management RMIT University 1 1 Today’s lecture • Stakeholder view of corporate social responsibility (CSR) • Key theoretical frameworks of CSR • Responsible and strategic management: “doing well by doing good” 2 2 CSR: Shareholder vs stakeholder approach • Corporate Social Responsibility (CSR) – refers to the idea that managers should consider the social consequences of economic actions when making business decisions Two opposing views on CSR Shareholder view of firm Q. Why does a business exist? Q. Who should the business serve? 3 3 Stakeholder view of firm Shareholder view of CSR “There is one and only one social responsibility of business- to use its resources and engage in activities designed to increase its profits so long as its stays within the rule of the game” (Milton Friedman) • If firms attempt to attain social goals, such as providing employment and social welfare, managers will lose their focus on profit maximisation, and therefore not appropriate 4 4 Stakeholder view of CSR • Social responsibility of firms goes beyond economic and legal responsibilities to adapt to changing societal conditions and pursue long-term goals that are good for society – A stakeholder is “any group or individual who can affect or is affected by the achievement of the organisation’s objectives” 5 5 Growing recognition about the importance of CSR “Most large companies, and even some smaller ones, now feature CSR (or sustainability) reports, managers, departments, or at least CSR (or sustainability) –project and the subject is increasingly promoted as a core area of management, next to marketing, accounting, or finance” Crane, Matten & Spence (2008) 6 6 7 7 MNEs changing the world? Fortune Magazine: “Change the World” Company List 8 8 Carroll’s pyramid of CSR Desired Expected Required 9 9 Triple bottom line and CSR 10 10 Case: Sustainability at Unilever • Considered as a leading advocate of business sustainability • Implemented through the Unilever Sustainable Living Plan (USLP) 11 11 Case: Sustainability at Unilever https://www.unilever.com/sustainable-living/ 12 12 Sustainability and strategy • Traditional view: “Arm-wrestling match”: Trade-off between social / environmental benefits and industry’s private costs • Realisation that sustainability is the right thing to do, and can also drive revenue, savings, and give a competitive edge • CSR can be more than just a cost, constraint or charitable deed – • “Properly designed environmental standards can improve resource productivity” (Porter and van der Linde, 1995) Can MNEs’ involvement in CSR generate opportunity, innovation and competitive advantage – while solving social problems? 13 13 Circular economy • Alternative to a make, use, dispose model with as much re-use and recycling as possible • Extending the life of products and materials to prevent the overgeneration of waste • The longer materials and resources are in use, the more value is extracted from them https://www.ellenmacarthurfoundation.org/circular-economy/concept 14 14 Paths to develop sustainable products high ACCENTUATE ANY OF THE THREE ACQUIRE ARCHITECT EXISTING “GREENABLE” ATTRIBUTES low low DEVELOPMENT CAPABILITIES OF “GREEN” PRODUCTS high Source: Unruh and Ettenson, 2010 15 15 Paths to develop sustainable products • Path #1. Accentuate • Playing up existing green attributes in the company’s portfolio • Credibility of its sustainability efforts is crucial – Important not to overreach in its sustainability claims which may attract activist and consumer backlash, and undermine the company’s legitimate sustainability claims • E.g. Brita – growing criticism towards water bottlers for clogging landfills – company research: replacing bottled water with Brita system could potentially keep millions of bottles a year out of landfills – adopted an integrated cross-media communication strategy to tout Brita’s green attributes, educate consumers about bottle waste and encourage a switch to greener alternatives – water pitcher sales jumped by 23% within a year (compared to 2% for the category) 16 16 Paths to develop sustainable products • Path #2. Acquire • Buying other company’s green brand when there is no obvious candidates for accentuation • E.g. High profile green acquisitions – The Body Shop by L’Oréal – Ben & Jerry’s by Unilever – Tom’s of Maine by Colgate-Palmolive 17 17 Paths to develop sustainable products • Path #3. Architect • Building new offerings from scratch • Can be slower and more costly than the other options, but may allow the company to build valuable competencies • E.g. Toyota – Development of a hybrid car, Prius – Dominates fast-growing market for fuel-efficient cars – Successfully transferred the expertise and know-how to luxury cars market (Lexus) 18 18 Week 7: Understanding MNEs Dr Joseph H. Kim School of Management RMIT University 1 1 Today’s lecture • MNE and FDI: Eclectic paradigm of FDI • Competitive advantage and MNE • Sources of competitive advantage ◦ Industry-based approach ◦ Resource-based approach 2 2 Multinational enterprise (MNE) A firm that engages in foreign direct investment and operates in multiple countries 3 3 The FDI vocabulary • FDI vs FPI ◦ Foreign Direct Investment (FDI): investment in business activities outside a firm’s home country, giving it controlling ownership over those activities ◦ Foreign Portfolio Investment (FPI): investment in a portfolio of foreign securities such as stocks and bonds • FDI vs exporting & licensing ◦ Exporting: sales of products produced in one country to residents in another ◦ Licensing: occurs when a firm (the licensor) licenses the right to produce its product, use its production processes, or use its brand name or trademark to another firm (the licensee) 4 4 Challenges in operating in foreign markets Liability of foreignness 5 5 Why do firms become MNEs by engaging in FDI? Ownership advantages Dunning’s eclectic (OLI) paradigm Location advantages Internalisation advantages 6 6 6 Ownership advantages (Why of FDI) • Embraces market power theory (Hymer, 1960) ◦ When entering foreign markets, firms have innate disadvantages against competing local firms ◦ If they are to engage in FDI, the firms must possess firmspecific assets (FSA) which create advantages over local firms e.g. technology, patents, managerial/marketing know-how, brand name, access to information, product differentiation and skilled personnel etc ◦ Ownership of FSA makes FDI a viable option 7 7 7 Location advantages (Where of FDI) • Different location advantages may be exploited by firms according to different motives ◦ Market-related location advantages − − − − Larger & fast growing market Interaction with customers Transportation: perishable? breakable? heavy? Protectionism ◦ Resource-related location advantages − − Natural resources Low labour costs ◦ Knowledge-related location advantages ◦ Network-related location advantages 8 8 8 Internalisation theory (How of FDI) • Based on the market imperfection and transaction cost theories: Market failure induces FDI (Buckley, Casson, Hennart in the 1960s and 1970s) ◦ Examples of market impediments − Transportation costs − Trade barriers − Transaction costs • FDI “internalises” (replaces) external market relationships within one firm (the focal MNE) owning and controlling activities • Focuses on modes of transaction (entry): Why does FDI occur instead of exporting or licensing? 9 9 9 Internalisation theory: market vs firm Export Turnkey Licensing Franchising Joint venture Wholly-owned subsidiary Less commitment/ investment More commitment/ investment Less control More control Reliance on market Internal to firm 10 10 Strategic alliance 10 Competitive advantage in IB • Competitive advantage is obtained “when an organisation develops or acquires a set of attributes (or executes actions) that allow it to outperform its competitors” (Wang, 2014) • A firms is said to have a competitive advantage “when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors” (Barney, 1991) 11 11 11 Sources of competitiveness: industry vs firm Industry-based view Resource-based view 12 12 12 Industry-based view • What is industry? – A group of firms producing products that are similar to each other • Theories of industry competition – Industrial organisation (IO) economics model Industry structure determines firm’s conduct (strategy) and performance (SCP model) Structure Conduct Performance 13 13 Porter’s Five Forces Framework • “Translated” and extended from the SCP model in 1980 by Michael Porter • Firm’s competitiveness depends on the degree of ‘five forces’ within the industry • The framework is evidence that; – not all industries are equal in terms of their potential profitability – industry-specific conditions play an important role in determining firm performance 14 14 Porter’s Five Forces Framework 15 15 Resource-based View • Firm specific resources and capabilities drive firm strategy and performance – Firm: a heterogeneous bundle of resources and capabilities 16 16 How can a firm create sustained competitive advantage? 17 17 How valuable / rare is the resource? • Valuable: do the resources and capabilities add value? ◦ Only value-adding resources can possibly lead to competitive advantage • Rare: are the resources and capabilities rare? ◦ The basic condition of competitive advantage: scarcity – Resources that are valuable but not rare lead to competitive parity, not advantage. – “If everyone has it, you can’t make money from it” 18 18 How imitable is the resource? • Resources that can be easily copied or imitated provide little scope for competitive advantage • Competitive advantage from complex, tacit and hard-to-describe knowledge – Tacit knowledge: difficult to articulate, write down or codify as an algorithm, formula, or set of rules • Valuable, rare, but imitable resources/capabilities = temporary advantage • Only valuable, rare and hard-to-imitate resources/capabilities = sustained competitive advantage 19 19 Are the firms organised to exploit resources and capabilities? • Question of Organisation – How is a firm organised to develop and leverage the full potential of its resources and capabilities