Introduction to international business
International business involves a company engaging in international economic activity, while
global business involves a company engaged in business around the globe, including
international and domestic business activity.
1. A multinational enterprise (MNE) is a firm engaging in foreign direct investment
(FDI).
a. FDI involves investment in, controlling and managing value-added activities in
other countries.
In international business, there are important economic terms:
1. Gross national product (GNP) is measured as the sum of value added by resident
firms, households and governments operating in an economy.
2. Gross domestic product (GDP) is the total market value of all final goods and services
produced within a country, within a given time period (usually a calendar year).
3. Gross national income (GNI) is GDP plus income from non-resident sources abroad.
a. This term is used by the World Bank and other international organisations to
supersede the GNP term.
4. Purchasing power parity (PPP) is an adjustment made to GDP to reflect differences in
cost of living.
An important question in international business is what determines the success and failure of
firms around the world?
1. To answer this, we focus on 2 perspectives:
a. The institution-based view.
b. The resource-based view.
The institution-based view suggests that the formal and informal “rules of the game” (so
institutions) explain firms’ performance around the world.
1. Doing business abroad requires knowledge about the formal and informal rules of
doing business in various countries.
a. Formal rules include the laws and regulations governing businesses, such as
EU directives, that are issued and enforced by national authorities.
b. Informal rules include the culture, norms and values of a country.
2. However, a major drawback of this perspective is that, if we push it to its logical
extreme, then performance is determined only by the external environment.
,The resource-based view focuses on a firm’s internal resources and capabilities, suggesting
that only a few companies thrive in difficult environments.
1. This implies that foreign companies have to overcome a liability of outsidership (or
liability of foreignness), an inherent disadvantage that outsiders experience in a new
environment due their distant origins from the host environment, as well as their lack
of local experience, leading to a lack of familiarity, networks and legitimacy in the
local context.
2. Nonetheless, some firms control resources and capabilities that allow them to
overcome their liability of outsidership and achieve a sustainable competitive
advantage in their host countries (ex: Coca Cola, Microsoft).
a. These resources must be firm-specific, that can be transferred across national
borders, and that create value for customers in that country.
Globalisation
Globalisation is a hotly debated topic across the world.
1. Supporters praise its contributions to economic growth, standard of living, sharing of
technologies and cultural exchange.
2. Critics argue that it undermines wages in rich countries, exploits workers in poor
countries and gives MNEs too much power.
Therefore, there can be many definitions to globalisation.
1. Globalisation relates to the accelerated spread of the internet, thus the spread of the
information and communication technology.
a. For example, today we can use WhatsApp or Skype to communicate instead of
sending letters.
b. We also have access to online shopping, including access to products from
overseas, through Amazon.
2. Globalisation relates to the rising power of MNEs and increased inequality.
a. For example, some companies generate turnover that is higher than a whole
country’s GDP.
3. Globalisation is a force eliminating differences among national cultures and identities.
a. Some argue that the world is on a path of convergence, where consumers
become more alike and companies sell the same products everywhere on the
world.
4. Globalisation creates increased competition for jobs, especially for low-skilled
workers.
a. For example, the automotive industry in the US suffers a lot from European
and Asian competition.
,We can define globalisation as a process that brings more connections and understandings
between different parts of the world, including economic, political and social aspects, as well
as various actors in general.
1. Some argue we’re seeing de-globalisation.
a. For example, people prefer eating the vegetables they’re growing in their own
garden rather than buying them at the supermarket.
b. When looking at global imports, we see that they have increased from the 90s.
i. This trend is being driven mainly by China and India, who are
exporting massively abroad.
c. When looking at the UNCTAD (UN conference on trade and development)
World Investment Report of 2020, we see that global FDI inflows generally
decreased from 2015 to 2019, then plummeted due to the Covid crisis, but
increased again since 2021.
d. When looking at real GDP growth rates in 2020, advanced economies had a
growth rate of 1.7, while emerging and developing economies 4.8.
e. When looking at the growth rate of gross fixed capital formation (GFCF, the
sum of FDI and local investment) in 2020, it was 2.4 for advanced economies
and 5.3 for emerging and developing economies.
2. Of course, the pandemic is responsible for this de-globalising trend (due to all the
restrictions in place, leading to lower exports/imports/FDI), but there’s a swinging
movement, where the globalisation trend regained momentum quite quickly.
Which companies actually are very international?
1. First, we divide foreign asset by total assets to determine the share of assets the
company has abroad.
a. However, for a small country like Luxembourg, the ratio can be quite high.
2. Second, we divide foreign sales by total sales to determine the share of sales the
company generated abroad.
3. Third, we divide foreign employees by total employees to determine the share of
foreign employees in the company.
4. Fourth, we take the average of the 3 ratios to get the transnationality index (TNI).
a. Many companies with a high TNI operate in the oil industry (ex: Royal Dutch
Shell, British Petroleum), car industry (ex: Toyota), telco industry (ex:
Softbank, Vodafone).
i. For the top 100 MNEs, the average TNI is 60%.
ii. However, in these industries we see some outliers with relatively low
TNIs (ex: Chevron Corporation in the oil industry, Siemens in the telco
industry, Apple in the tech industry).
, We also see a change in the country of origin of the big companies:
1. In the 90s, no Chinese companies were included in the Fortune Global 500, while
nowadays they represent the biggest companies on earth.
2. When looking at Chinese investment in Europe and North America, we see growing
investments until 2017 but a downward trend afterwards.
3. When looking at the effect of Chinese competition on manufacturing employment in
OECD countries, we see that countries like the UK deeply suffered from Chinese
imports.
We can also identify factors discouraging globalisation:
1. Brexit.
a. We can see that the regions with the highest share of “Leave” votes tend to be
the most economically linked with the EU, and the ones receiving the most
subsidies from the EU.
2. Covid.
a. All countries implemented different sanitary measures to contrast the
pandemic, which effectively created trade barriers.
3. US-China trade war.
4. Crisis in the Appellate Body of the WTO and consequent paralysis of the WTO.
5. US industrial policy (ex: CHIPS act, Inflation Reduction Act).
6. Export restrictions targeting China.
7. Russia-Ukraine war.
Three views on globalisation
There are 3 views on globalisation:
1. Friedman says that globalisation is advanced and inevitable.
2. Florida says that globalisation is concentrated and stable.
a. When looking at a world map, we can see peaks of light emissions in the big
cities across America, Europe and China, but not in the rest of the world.
3. Ghemawat says that globalisation is partial and limited.
a. For example, we could say that 90% of our online communications are with
friends and family.
