Global business environment

Post Global Financial Crisis Int’l Business Strategy Orr 2010 Did the international strategies of global business change in response to the GFC?. Post Global Financial Crisis Int’l

Principles of Economics Spring 2014

Global Business Environment

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Global Business Environment

The global business environment

– the environment in different sovereign countries,

with factors exogenous to the home environment

of the organization, influencing decision making

on resource use and capabilities

The external environment vs the internal

environment

– The external environment includes the social,

political, economic, regulatory, tax, cultural,

legal, and technological environments

Global Business Environment

To function effectively and efficiently, firms

operating internationally must understand the

social environment of the host country they

are operating in

Global Business Environment

Forces outside the firm’s traditional

boundaries are increasingly important in

determining the firm’s success

These forces in “the environment of business” differ among nations and over time 

requiring modifications in strategies and

management practices

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Four Sets of Forces

1 Social Forces:

– Subject of ethical codes and CSR strategies

– A major force underlying the CSR challenges in

international business is the difference in culture

among countries

– Hofstede and Bond (1988) conclude that each

country’s culture can be best examined in accordance with five dimensions: individualism/collectivism,

uncertainty avoidance, power distance,

masculinity/femininity, and long-term versus

short-term orientation

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Four Sets of Forces

– In China, the pervasive importance of guanxi

demonstrates the benefits that MNEs derive from

developing ongoing and long-term exchanges of

favors that link individuals, as well as the

organizations in which they work

– Personal relationships that involve an ongoing

exchange of favors may be criticized as petty

corruption that can pervade all types of business

transactions, both between firms and also with

government employees

– While some of this bribery can simply expedite

decisions and actions, other situations may involve

Four Sets of Forces

2 Technological Forces:

– The technological environment comprises factors

related to the materials and machines used in

manufacturing goods and services

– Each nation, and each region within each nation,

has its own unique innovation system that forms a

key component of the environment of business

– The reality rests to a large degree on culture, social

capital, education, and entrepreneurship

– Biotech, Global warming, green energy, etc

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Four Sets of Forces

3 Economic Forces:

– Economic forces differ among nations and

continually change over time

– Economic factors exert huge impacts on firms

working in an international business environment

– The economic environment relates to all the factors that contribute to a country's attractiveness for

foreign businesses, such as monetary systems and

macroeconomic variables (growth rates,

unemployment and inflation rates, and foreign

exchange rates)

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Four Sets of Forces

4 Political and Governmental Forces:

– Political and governmental forces are related to

each of social, technological, and economic forces

– These forces play a key role in the building of social capital, the fostering of entrepreneurship, and the

facilitation of immigration

– The political environment in a country influences

the legislation and government rules and regulations under which a foreign firm operates

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Post Global Financial Crisis Int’l

Business Strategy

Orr (2010)

Did the international strategies of global

business change in response to the GFC?

– 1 global businesses based in home countries which experienced a deep recession

– 2 global businesses based in home countries which did experience recession, but had strong financial

and capital markets leading to rapid recovery

– 3 global businesses based in home countries which did not experience recession

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Post Global Financial Crisis Int’l

Business Strategy

Economic theory predicts a reduction in

internalization when the cost of capital is higher,

as experienced in the recent global financial

crisis (Ricardo 1963)

– This prediction has been supported by a global

reduction in foreign direct investment (FDI) of

30 % (UNCTAD, 2009)

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Post Global Financial Crisis Int’l

Business Strategy

Empirical evidence from the 1991-1992 world

recession identified reduction of internal costs as

a post-recession global business response

– This was primarily achieved by flattening hierarchies and outsourcing operations to lower-cost countries

– Outsourcing has became much more attractive as low labor cost countries develop their technical and

resource capacity to provide activities such as IT,

accounting, basic manufacturing and call center work

in response to demands from international businesses based in developed countries (Sharpe, 1997)

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Post Global Financial Crisis Int’l

Business Strategy

– This was primarily achieved by flattening

hierarchies and outsourcing operations to lower-cost countries

– Outsourcing has became much more attractive as

low labor cost countries develop their technical and

resource capacity to provide activities such as IT,

accounting, basic manufacturing and call center

work in response to demands from international

businesses based in developed countries (Sharpe,

1997)

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Post Global Financial Crisis Int’l

Business Strategy

Focusing on core activities also has the effect of

directing an organization’s strategies away from

– Internalization is a form of geographical

diversification

– Even companies producing global products and

services (such as airlines and book publishers) found that the level of organizational structure variation

between that of the home country and subsidiaries in other countries necessary to sustain the business was

a large barrier to internalization for companies based

in home countries recently recovered from a

recession (Birkinshaw and Morrison, 1995) 14

Post Global Financial Crisis Int’l

Business Strategy

1 Deeply entered a recession

– Iceland, Japan

Iceland: banking industry

– FDI has been substantial  the objectives of

increasing economies of scale to globally

competitive levels and gaining access to foreign

markets (Óladóttir, 2009)

– This internalization behavior ended when Iceland

entered a depression (OECD Economic Surveys,

2009), precipitated by the collapse of the banking

industry (Country Monitor, 2009a)

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Post Global Financial Crisis Int’l

Business Strategy

1 Deeply entered a recession (cont’)

Japan: Toyota

– Profitability was badly affected by the GFC  a fall

from record profits to record losses over 12 months

– Toyota's Japanese operations were dependent on its

export market and attractive exchange rates

– In reaction to global currency fluctuations, the lower

value of currencies in countries such as the US, and

the possible mercantile behaviors of the governments

of some of its host country markets, it has decided to increase the percentage of local production in the

products it sells in its foreign markets 16

Post Global Financial Crisis Int’l

Business Strategy

1 Deeply entered a recession (cont’)

US: Exxon Mobil

– In response to the GFC, Exxon Mobil reduced costs

by outsourcing IT operations to lower-cost Indian IT

service providers (EmergingMarketsNOW 2009a)

– It also moved into related diversification such as R&D into biofuels

– As a result of the demand for energy in industries

based in countries not in recession, Exxon Mobil has been able to maintain some internalization, but only

using funds from international markets in the same

Post Global Financial Crisis Int’l

Business Strategy

Implications

– Porter's theory of national competitive advantage: the

increased cost of capital in foreign markets (a

supporting industry) is an effective barrier to

internalization

– Exchange rate theory: weak domestic exchange rates for countries still in significant recession will increase the cost of internalization

– Political theory: home country governments’

initiatives will be focused on domestic business

development, reducing the effective home country

government’s support for internationalization

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Post Global Financial Crisis Int’l

Business Strategy

2 Briefly entered a recession

– Australia, Singapore

– As a result of the relative stability of their home

country environment, exchange rate instability and

the reduction in attractiveness of foreign markets,

companies with these home countries reduced their rate of internalization

 In these countries, government intervention has made

the home country markets more attractive and has

caused international businesses to switch some of their development investment to their home country market

Post Global Financial Crisis Int’l

Business Strategy

2 Briefly entered a recession (cont’)

– International businesses with home markets such as Australia, which are located in geographical regions experiencing continued high economic growth, still tended to internationalize into high economic

growth rate foreign markets

Implications

– Porter's Five Forces theory: a return to

internationalization activities in higher economic

growth rate host countries because the threat of new entrants (from other developed countries) is

Post Global Financial Crisis Int’l

Business Strategy

2 Briefly entered a recession (cont’)

– Exchange rate theory : although the initial

internationalization investment outlay may be

higher, interest rates in those home countries were

generally at an all-time low, and the higher foreign

market currency exchange rates, resulting from the

high levels of economic growth, would result in

greater profits to repatriate to the home country

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Post Global Financial Crisis Int’l

Business Strategy

3 Never entered a recession

– Maintained strong levels of internalization activity

– China, India

China: Sinopec

– Sinopec is experiencing a profit increase in 2009 off 50% (Country Monitor 2009c)

– Whilst Sinopec is investing heavily in establishing

production facilities and in exploration in China, it

is also investing heavily in acquisitions outside of

China

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Post Global Financial Crisis Int’l

Business Strategy

China: Sinopec (cont’)

– To fund its acquisitions, it formed partnerships with companies such as Kuwait Petroleum Corporation

and released bonds into the Chinese bond market

(Company Monitor 2009)

– Sinopec's international strategy is to meet

increasing domestic demands through expansion of its direct access to oil and gas assets (King 2009)

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Post Global Financial Crisis Int’l

Business Strategy

India: Tata

– Tata Motors took advantage of the weakness of

competitors whose home country markets were in

recession and acquired the UK Jaguar Land Rover

company

– a net profit of US$300 million and an increase in

revenue of 25%, indicating that business activity

remains strong in its home country market (Sheth et

al 2009)

– It has also been increasing its internationalization in those Asian countries which have not experienced a deep recession (EmergingMarketsNOW 2009b) 24

Post Global Financial Crisis Int’l

Business Strategy

Implications

– Exchange rate theory: The weakening of the exchange rates in countries which have experienced a recession, relative to the home country currency of the

international business, makes companies in those

home country markets attractive acquisition targets

– Dunning's eclectic theory: local conditions are

attractive due to the reduced resources and capital

available to local companies with which to compete

against an international business acquiring local

businesses

– Porter's Five Forces and national competitive

advantage theories do not predict this international

strategy behavior of acquisition of companies in weak

Post Global Financial Crisis Int’l

Business Strategy

Conclusion

– Two principal factors are dominant in determining

international strategy during times of financial crisis - home country market conditions, and the level of

domestic industry protection introduced by the foreign country government in response to the economic

downturn

– Other factors including the variability in relative

exchange rates also influenced international strategy

during financial crises

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Figure 1 International Strategy Response

to Crises

Strategy Response to Crises