International Management

Phatak, Bhagat, and Kashlak

McGraw-Hill/Irwin
International Management

2005 The McGraw-Hill Companies, Inc., All Rights

Chapter 1
An Introduction to International
Management

McGraw-Hill/Irwin
International Management

2005 The McGraw-Hill Companies, Inc., All Rights

1-3

Chapter Objectives
Define the concepts of international business and international
management.
Examine the transnationality of countries and companies
Distinguish among the various types of international mindsets
observed in international firms.
Discuss the stages of development of an international company.
Define and understand the strategic, marketing and economic
motives of firms seeking to expand internationally.
Explain the strategic objectives and sources of competitive
advantage for an international firm.

1-4

Chapter Topics
The International Management Setting
What is International Business
What is International Management
International Companies and International Mindsets
The Evolution of an International Enterprise
Why Firms Seek to Engage in International Business
Strategic Objectives and Sources of Competitive
Advantage
The Environment of International Management

1-5

Fig. 1-1: Managing in the International

Environment
Section I: The Macro-Environment
(Economics, Politics, Infrastructure Laws, Culture)

Section II: Firm-Level Initiatives

(Strategy, Structure, Implementation, Control)

Section III: Manager Responses

(Communication, Motivation, Leadership,
Negotiations, Responsibility

1-6

Definition of International Management

International management is defined as a process of

accomplishing the global objectives of a firm by:

effectively coordinating the procurement, allocation,
and utilization of the human, financial, intellectual,
and physical resources of the firm and across national
boundaries, and
effectively charting the path towards the desired
organizational goals by navigating the firm through a
global environment that is not only dynamic but often
very hostile to the firms very survival.

1-7

Domain of International Management

Why, when, and how does a business firm (as an
organization) decide to go international including the
expansion and reduction of such internalization?
Why, when, and how is its organizational behavior a
broad term covering mission, objectives, strategies,
structures, staff, and processes [particularly, decisionmaking] internal, and external transactions and relations,
performance, impact, etc. altered by
internationalization.

1-8

An International Company
is an enterprise that has operations in two or more countries. If it has
operations in several countries then it may have a network of wholly or
partially (jointly with one or more foreign partners) owned producing
and marketing foreign affiliates or subsidiaries. The foreign affiliates
may be linked with the parent company and with each other by ties of
common ownership and by a common global strategy to which each
affiliate is responsive and committed. The parent company may control
the foreign affiliates via resources that it allocates to each affiliate
capital, technology, trademarks, patents, and manpower and through
the right to approve each affiliates long- and short-range plans and
budgets.

1-9

Table 1-1: Largest International Companies

(Selected)

Global
Rank

1
2
3
4
5

Company

Wal-Mart Stores
Exxon Mobil
General Motors
BP
Ford Motor

2002 Revenues ($
millions)

219,812.0
191,581.0
177,260.0
174,218.0
162,412.0

1-10

Table 1-3: Labor Productivity of Foreign Affiliates and

Domestic Firms in Manufacturing in Selected Economies
Country

Foreign
Affiliates

Domestic
Firms

Ratio Foreign:
Domestic

U.S.A

103818

71006

1.46

U.K.

79402

51885

1.53

Netherlands

105793

69477

1.52

Ireland

268272

24571

10.9

China

7199

2633

2.73

France

75970

101732

0.75

Sweden

68845

77417

0.89

1-11

International Mindsets
Specific pressures will affect competition in
industries and firms that cross national
boundaries causing
1. international or home replication: a firm
utilizes the core competency or firm-specific
advantage it developed at home as its main
competitive weapon in foreign markets
2.a global orientation : view the world as a single
market and has its primary goal the creation of
standardized goods or services that will
address the need of customers worldwide.
.

International Mindsets

1-12

(contd.)

3. a multidomestic orientation that responds to

individual country opportunities and constraints
Increasingly, there are pressures for
international companies to be both globally
efficient and locally responsive. These
pressures derive from environmental changes
such as new technologies, unanticipated
competition, and the convergence of industry
boundaries. In such situations, firms exhibit a
transnational mindset to simultaneously gain
efficiency and local market benefits.

1-13

Foreign Market Entry Modes

Exporting
Counter-trade
Contract manufacturing
Licensing
Franchising
Turnkey projects
Non-equity strategic alliances
Equity-based ventures such as wholly-owned

subsidiaries and equity joint ventures

1-14

Fig. 1-2: Motives to Go International

Market-Seeking
Motives

The Historically Indigenous Firm

Cost-Reduction
Motives

Strategic
Motives

Market Seeking Motives :Theory of

Comparative Advantage
When a country specializes in some products, it may
not produce other products, so trade between
countries is essential. This is the argument made by
the classical theory of comparative advantage.
Comparative advantages allow firms to penetrate
foreign markets.

15

Market Seeking Motives : Imperfect

Markets Theory
If each countrys markets were closed from all
other countries, there would be no
international business.
At the other extreme, if markets were perfect
so that the factors of production (such as labor)
were easily transferable, then labor and other
resources would flow wherever they were in
demand.
16

Market Seeking Motives : Imperfect

Markets Theory
The unrestricted mobility of factors would
create equality in costs and returns and remove
the comparative cost advantage, the rationale
for international trade and investment.
The real world suffers from imperfect market
conditions where factors of production are
somewhat immobile.
Imperfect markets provide an incentive for
firms to seek out foreign opportunities.
17

Market Seeking Motives : Product

Cycle Theory
A firm is likely to establish itself first in its
home country a result of some perceived
advantage over existing competitors.
Foreign demand for the firms product will
initially be accommodated by exporting.

18

International Product Life Cycles

Insert chart page 7 Exhibit 1.2

19

1-20

Evolutionary Stages
Stage 1: Foreign Inquiry
Stage 2: Export Manager
Stage 3: Export Department and Direct Sales
Stage 4: Sales Branches and Subsidiaries
Stage 5: Assembly Abroad
Stage 6: Production Abroad
Stage 7: Integration of Foreign Affiliates

1-21

Evolution of Service Firms into Global Enterprise

Do not necessary go through various evolutionary

stages
After establishing franchise system at home enter
foreign markets by establishing franchise in foreign
countries by wholly owned parent company or jointly
owned with host country.

1-22

Cost Reduction Motives:

Venture overseas for cost reduction
Cheap labor is the strongest incentive
Eliminate or reduce high transportation
cost
Favorable host govt incentives and
inducements
Allocate funds for research to ;look
foreign markets.

1-23

Strategic Motives:
Follow major customers:
Bandwagon Effect when firms venture
abroad to follow their major
competitors
Cross-subsidisation: Using profits
generated in one market to compete in
another market

1-24

Strategic Objectives and Sources Of Competitive

Advantage
Global firms pursue three Objectives
Achieving Efficiency
Managing Risks
Innovation and Learning
Sources f competitive advantage
National Differences
Scale Economies
Scope Economies

1-25

Ex. 1-2: Global Strategy: An Organizing

Framework
Strategic
Objectives

National
Differences

Scale Economies

Scope Economies

Achieving efficiency Benefiting from

in current operations differences in factor
costs wages and cost
of capital.

Expanding and
exploiting potential
scale economies in
each activity.

Sharing investments
and costs across
products, markets, and
businesses.

Managing risks

Balancing scale with

strategic and
operational flexibility.

Portfolio
diversification of risks
and creation of options
and side-bets.

Managing different
kinds of risks arising
from market or policyinduced changes in
comparative advantage
of different countries.

1-26

Ex. 1-2
(contd.)
Strategic
Objectives
Innovation, learning,
and adapting.

National
Differences
Learning from societal
differences in
organizational and
managerial processes
and systems.

Scale Economies
Benefiting from
experience cost
reduction and
innovation.

Sources of Competitive Advantage

Scope Economies
Sharing learning across
organizational
components in
different products,
markets, or businesses.

1-27

Fig. 1-3: The International Environment

Political:
Governments
Ideology
Stability
Civil Strife

Economic:

Cultural:

Trade Agreements
Trading Blocs
GNP/Wages
Inflation

Customs
Values
Language
Religion

The
International
Company
Legal:

Infrastructure:

International Law
Host Country Laws
Home Laws
International Piracy

Communications
Internet
Transportation
Technology

Fig. 1-4: Fundamentals of International Management: A Model of International

Management

International
Environmental
Analysis
Economic Environment
& Infrastructure
(Chapter 2)
Political
Environment
(Chapter 3)
Legal
Environment
(Chapter 4)
Cultural
Environment
(Chapter 5)

Management/Implementation
of International Initiatives
International
Strategic
Initiatives
Strategies for
Intl Competition
(Chapter 6)

Organizing Intl Operations (Chapter 9)

Controlling Intl Operations (Chapter 10)
Managing Technology
and Knowledge(Chapter 11)
Intl Human Resource Mgmt (Chapter 12)

Foreign Modes
Of Entry
(Chapter 7)

Work Motivation (Chapter 13)

Leadership (Chapter 14)

Intl JVs and

Alliances
(Chapter 8)

Communications (Chapter 15)

Negotiations and
Decision-Making (Chapter 16)
Ethics and Social Responsibility
(Chapter 17)

1-28

1-29

Key Terms and Concepts

Foreign Direct Investment (FDI)
Definition of International Business
Definition of International Management
Definition of International Company
Transnationality Index
International Mindsets
Global orientation
Multidomestic orientation
Transnational orientation

1-30

Key Terms and Concepts

(contd.)

Evolution of an International Enterprise

Evolution of Service Firms
Motives for International Expansion
Market seeking
Cost reduction
Strategic

Global Strategy