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McGraw-Hill/Irwin

International Management
2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
International Management
Phatak, Bhagat, and Kashlak
McGraw-Hill/Irwin
International Management
2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter 1
An Introduction to International
Management
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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.
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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
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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
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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.

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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, decision-
making] internal, and external transactions and relations,
performance, impact, etc. altered by
internationalization.
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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.
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Table 1-1: Largest International Companies
(Selected)
Global
Rank
Company 2002 Revenues ($
millions)
1
2
3
4
5
Wal-Mart Stores
Exxon Mobil
General Motors
BP
Ford Motor
219,812.0
191,581.0
177,260.0
174,218.0
162,412.0

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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
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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.
.
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International Mindsets
(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.
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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
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Fig. 1-2: Motives to Go International
The Historically Indigenous Firm
Cost-Reduction
Motives
Strategic
Motives
Market-Seeking
Motives
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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.
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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.
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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.
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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.
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Insert chart page 7 Exhibit 1.2
International Product Life Cycles
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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

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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.

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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.




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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


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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





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Ex. 1-2: Global Strategy: An Organizing
Framework
Strategic
Objectives
National
Differences
Scale Economies Scope Economies
Achieving efficiency
in current operations
Benefiting from
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 Managing different
kinds of risks arising
from market or policy-
induced changes in
comparative advantage
of different countries.
Balancing scale with
strategic and
operational flexibility.
Portfolio
diversification of risks
and creation of options
and side-bets.
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Ex. 1-2
(contd.)
Strategic
Objectives
National
Differences
Scale Economies Scope Economies
Innovation, learning,
and adapting.
Learning from societal
differences in
organizational and
managerial processes
and systems.
Benefiting from
experience cost
reduction and
innovation.
Sharing learning across
organizational
components in
different products,
markets, or businesses.
Sources of Competitive Advantage
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Fig. 1-3: The International Environment

Economic:
Trade Agreements
Trading Blocs
GNP/Wages
I nflation


Legal:
I nternational Law
Host Country Laws
Home Laws
I nternational Piracy


I nfrastructure:
Communications
I nternet
Transportation
Technology



Cultural:
Customs
Values
Language
Religion




Political:
Governments
I deology
Stability
Civil Strife


The
International
Company
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Fig. 1-4: Fundamentals of International Management: A Model of International
Management
International
Environmental
Analysis
Economic Environment
& I nfrastructure
(Chapter 2)
Political
Environment
(Chapter 3)
Cultural
Environment
(Chapter 5)
International
Strategic
Initiatives
Strategies for
Intl Competition
(Chapter 6)
Foreign Modes
Of Entry
(Chapter 7)
Intl JVs and
Alliances
(Chapter 8)
Organizing Intl Operations (Chapter 9)
Controlling Intl Operations (Chapter 10)
Intl Human Resource Mgmt (Chapter 12)
Work Motivation (Chapter 13)
Leadership (Chapter 14)
Communications (Chapter 15)
Ethics and Social Responsibility
(Chapter 17)
Legal
Environment
(Chapter 4)
Management/Implementation
of International Initiatives
Managing Technology
and Knowledge(Chapter 11)
Negotiations and
Decision-Making (Chapter 16)
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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
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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

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