Challenges within International Business

2008

 

München, November 2008


by Martin Hesse, HD08A

University of Cooperative Education, Mosbach


Table of contents

1.A short introduction to International Business

2.Globalization: Opportunity or Threat?

3.Challenges within International Business

3.1.The challenges for businesses within their international activities

3.1.1.Different types of international activities

3.1.2.What are the challenges companies face?

3.1.2.1.The role of culture and language

3.1.2.2.Legal and technological forces

3.1.2.3.Foreign Exchange Risks: The Dollar, the Euro and a BMW

3.1.2.4.Supply Chain Risks: Teddy bears abandon China

3.1.2.5.Ethics and social responsibility: H&M under attack

3.2.The challenges for politics

3.3.The financial market meltdown: Challenges in the financial system

3.4.How can we save the environment in times of globalization?

4.Sources



1.A short introduction to International Business

International business describes business transactions in which more than one country is involved. The stopping criterion is that a firm or organization is operating in foreign countries.

These companies are often called Multinational Corporations (MNC’s). Well known MNC’s are McDonald’s, Coca Cola, Metro, Daimler and Tesco.

Sometimes companies become active in other countries to offer their goods or services, but more often they have other attempts. Today it can be lucrative to build or relocate a plant in a foreign country because of lower labour costs. Borrowing money in one country and using it in another can be as reasonable as relocating headquarters into a certain country because of fiscal advantages.


2.Globalization: Blessing or Curse?


International business has grown so swiftly in the past years that we say we are living in the era of globalization. If you google “globalization” you will have a choice of more than 23 million articles. It indicates that globalization is a controversially discussed and highly complex phenomenon.

We should be aware that globalization is not a process which started after the turn of the millennium. Long time before Google, already in the 11th century, the Venetian republic made a contribution to globalization by trading with other countries. The expeditions of the Portuguese, Spanish and Dutch quickened the worldwide integration. Electricity, increasing railroad networks and the gold standard had a share in this process. It should become apparent that the linkage among national markets and technological progress are not forced, they are a natural result of human ambitions: freedom, a better life, new discoveries and to broaden one’s horizon.

Reflecting the achievements in the last 60 years is impressive. The GDP per capita tripled, in some developing countries it was even more. Medical advance brought longer life expectancy. The BRICs and other developing countries are now integrated in the global economic environment. They do not only provide raw materials they are also producing goods and services.

But there is also a shady side of globalization and challenges we have to deal with:

•The financial market meltdown arouses the arguments of the anti-globalization activists. Stephan Schilling, a financial expert at Attac, said: “imagine the hundreds of billions of Dollars used to fight hunger, poverty and diseases like malaria” instead of saving the banks.

•Besides it is noticeable that firstly the industrialized countries benefited from globalization. Actually there is evidence that some developing countries have been left behind.

•Brazil, as a BRIC state, faced massive deforestation and the slashing of thousands of acres of Amazonian rainforest to meet the growing demand in industrialized countries. Today, the environment is a global public good there is necessity of international agreements to protect it.

Finally we are confronted with a various number of problems. The challenge is to use the chances and limit the risks.


3.Challenges within International Business

3.1.The challenges for businesses within their international activities

3.1.1.Different types of international activities


The ever-increasing level of world trade, intensifying competition and opening of new markets have allowed – and sometimes forced – businesses to expand their operations. At present there are various types of International Business activity.

Selling goods and services outside the companies’ home country increases the number of potential customers. The chance to gain turnover and profit is the most common reason why firms expand to foreign countries.

For an industrial company it is often useful to build plants or establish subsidiaries in foreign countries. Popular reasons are savings for transport and logistics or lower labour cost. These advantages or concrete subventions motivate companies to move their production or administration.


3.1.2.What are the challenges companies face?

3.1.2.1.The role of culture and language


The following four cases shall demonstrate the meaning of cultural aspects and language in International Business:

I)In the Arabian Peninsula a soft drink was introduced with a six-pointed star on its label. Unfortunately the drink was unsuccessful as the six-pointed star is a synonym for Israel.

II) McDonalds’ Japanese Ronald McDonald offensive was a mistake: his white-painted face means death in the Japanese         culture.

III) Ford introduced a motor truck in Spain named “Fiera”, but in Spanish “Fiera” means  ugly shrew. The truck did not sell good.

The examples I)-II)  show very clearly how delicate an international marketing campaign can be for a foreign company. The challenge for managers is to handle different attitudes, values and behaviour that govern human interdependencies. Apart from that the management and personnel has to integrate in a new language area. Example III) demonstrates that it is often smarter to create a new product name or slogan. One of the biggest challenges of international marketing is that the conditions and regulations differ from country to country.

Apart from that, human resources management is also very closely connected with cultural aspects. In a discussion with Thomas Gillsch, founder and CEO of MTG Germany, he said that he was unable to do business with Russians when he came to St. Petersburg in the mid-nineties. Russians wanted to do business with Russians. The former Hugo Boss Manager lived two years in Moscow and St. Petersburg until he had the bright idea of hiring Russia Germans. The Russia German working force was the only way to do business with fashion sellers in Russia. For example, Russia Germans from Kazakhstan have German employee morale and are able to communicate with customers in Kazakhstan, as well as the German management. His concept was a great success. Thus it appears that foreign business managers have to be experienced and excellent, but the cultural adaptability is considered a key skill. Hiring local personnel can help to balance these interdependencies.


3.1.2.2.Legal, social and technological forces


In contrast to domestic firms, which have to follow the laws and customs of the home country, an international business has to obey the laws of the host country, too. The regulations in these countries can differ dramatically for historical, cultural(a), political and religious(b) reasons. Laws and taxes influence necessary inputs such as labour, raw materials and technology. They can even affect the business location:

(b) The Islamic Republic of Iran forbids alcohol, because of that there is no presence of international beer breweries. (a) Also within a country the laws can vary - some states in the U.S. allow lap dance bars - others forbid them.

In some countries the settling of conflicts can be complicated. In Portugal or India civil suits often take many years to traverse their courts. Thus many international businesses need to resolve disputes privately. Especially in dictatorships and some developing countries the legal system is often called bureaucratic law. In these countries it is very hard to do business, as the governmental organisations are almost always corrupt.
Today, many industries fear foreign investors and private equity companies. As a reason of that the governments encourage for laws, who give them the chance to disfavour these foreign investments. Many laws are directed against foreign firms – in Russia BP was factually forced to cooperate with a state-owned oil company, when they wanted to do their business. The Russian government even didn’t issue Visas to BP’s employees – officially there have been technical difficulties.

In Venezuela all oil companies were privatized and foreign companies had to leave the country. Furthermore disregardful laws can lead to massive problems. For example, in China, the law does not protect intellectual property (IP) sufficiently. For that reason the Hollywood industry loses billions of Dollars of revenue every year.


3.1.2.3.Foreign Exchange Risks: The Dollar, the Euro and a BMW


A Euro costs 1.25 US$ today, but a few months ago the exchange rate was on the historic amount of 1.60 US$. Apart from that, in the past three weeks the Yen won over 20% towards the Euro and the Dollar. The financial crisis destabilized foreign exchange (FOREX) rates. For example, a BMW’s cost of production per 10,000.00 € would range between US$ 12,462.00 (October 2008) and US$ 15,962.00 (April 2008) – a difference of US$ 3,500.00. Due to this currency fluctuation planning reliability decreases. In this sense export-oriented companies need foreign exchange hedging. Financial service providers (e.g. Bank of Queensland) help companies to minimize their foreign exchange risks.


3.1.2.4.Supply Chain Risks: Teddy bears abandon China


In early July of 2008, the Margarete Steiff GmbH decided to arrange one of the biggest homecomings of a foreign company in China. Martin Frechen, CEO of the world’s most famous teddy bear manufactory said in Stuttgarter Nachrichten, “there were certain problems with quality and delivery times”.  The example shows that supply chain risks play a bigger role in international business. He admitted that the Chinese production lines saved Steiff money on salaries, but cost the company its reputation. The managing director conceded that it took 18 months to train a worker to make a Steiff animal. Fed up with poor workmanship high staff turnover, delays and rising shipping costs, Steiff is moving the competences back to Giengen an der Brenz until 2010.


3.1.2.5.Ethics and social responsibility: H&M under attack


Since 1997, Hennes & Mauritz (H&M), world market leader in just-on-time discount fashion, is accused of using child labour. That year Swedish television showed a documentary about a plant in the Philippines. H&M denied the claims. Because of that H&M introduced a code of conduct (COC) who prohibits, amongst other things, child labour. But it is nearly impossible to monitor 2700 suppliers.

H&M also joined the Fair Labour Association in 2006. The peace with investigative Swedish and German media was not for long. In 2007 a new documentation showed child labour on H&M’s Usbekistan cotton farms. Especially for MNC’s it is very hard to ensure fair working conditions. The business competitors often force the firms to lower the price, which means that costs need to be reduced.

The example shows that social responsibility towards all employees and suppliers employees is very important. Not least, also the companies’ image suffers from such reports and documentaries.


3.2.The challenges for politics


International Businesses are exposed to a large amount of political risks. Loss might be the result of

a)Events caused by factors outside the control of government, such as war, revolution, terrorism and strikes.

b)Actions of legitimate government authorities, such as expropriation, forced divestiture, confiscation, cancellation or unfair calling of performance bonds.

Almost every state tries to attract foreign investors and international businesses to improve the residents’ quality of life. The challenge a government is to appear stable and calm.

On September 20, Pakistan was shaken by a deadly suicide bombing at Islamabad’s Marriott Hotel. It is an example that international corporations are often subject to major threats. The Islamic Republic of Iran has nearly no international businesses in their country, as the government expropriated many of them. But apart from that, in the past years many developing countries (especially the BRIC’s) grew very rapidly, when they opened their markets to international investments.


3.3.The financial market meltdown: Challenges within the financial system


Nikkei -41%. Dow Jones -29%20. DAX -33%20. 2 months. The financial market meltdown imbalanced the international stock markets and initialized a worldwide recession. The crisis started when U.S. residents weren’t able to pay their real-estate credits. It was the consequence of the granting of unsecured loans. American banks didn’t run credit checks of residents building a house properly. As the number of unpaid credits rose up to billions of missing Dollars, mayor U.S. investment banks collapsed. The state had to intervene. The situation appeared to be an American made American problem, but it was not. Renowned international banks were closely connected to these collapsing U.S. institutes. The worldwide crisis was perfect. UBS (Switzerland), Barclays (United Kingdom), Fortis (Netherlands), Hypo Real Estate (Germany) they all had write-offs of billions of Dollars. Iceland – a whole country – is bankrupt. The international banks don’t borrow money each other anymore.

Developing countries, companies, households, banks and many others are dependent on credits. If the banks don’t trust themselves any longer, it will have fatal consequences. The International Monetary Fund, central banks and governments are searching for a solution to limit the financial market meltdown and to make the international financial system safer.


3.4.How can we save the environment in times of globalization?


Scientifically there is no doubt that globalization is very closely connected to deforestation, desertification and the greenhouses gases. The biggest environmental challenge in the near future is to fight ecological destruction, the emission of greenhouse gases and to treat the environment respectfully. A widely discussed solution can be emission certificates. The difficulty is that all nations ought to sign and ratify such an agreement. Ecologically aware states as Denmark, California, Sweden or other European countries cannot change the world. The consequences of ignoring environmental issues are global.


4.Bibliography


A.Literature

1.“International Business”, Czinkota R., Thomson Southwestern, 7th Edition; pages 1-50

2.“Marketing und Käuferverhalten”, Schneider W., Oldenbourg, 2nd Edition; pages 199-200

3.„International Business“, Griffin R.W., Pearson Prentice Hall, 5th Edition; pages 11-19, 58-71

4.„Krankt der Kapitalismus?“, Financial Times Deutschland, page 30, 17th of  October 2008


B.Internet and other Sources (November 5th 2008)

1.“GDP per capita: Australia”; http://www.economagic.com/em-cgi/data.exe/rba/ggdpcvgdppc

2.“Steiff moves teddy bear production from China to Germany”, Times Online; http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article4265664.ece

3.“Probleme in China: Steiff holt Teddy-Produktion nach Deutschland zurück”, Spiegel Online; http://www.spiegel.de/wirtschaft/0,1518,563408,00.html

4.“Indiens IT-Exporte erhöhen sich um 33%“, PC Welt; http://www.pcwelt.de/it-profi/business-ticker/587008/indiens_it_exporte_erhoehen_sich_um_33_prozent/

5.“Oligarchen verklagen BP wegen TNK-BP“, Handelsblatt; http://www.handelsblatt.com/unternehmen/industrie/oligarchen-verklagen-bp-wegen-tnk-bp;1442502

6.“Interview with Dr. Daniel Nepstad: Amazon rainforest…”; http://news.mongabay.com/2007/0604-nepstad_interview.html

7.Discussion between Thomas Gillsch and Martin Hesse, January 8th 2008, Moscow (Russian Federation) - please ask for manuscripts

8.“H&M Briefing (2004)”; http://www.nosweat.org.uk/node/256

9.“Supply Chain Monitoring”, H&M Company http://www.hm.com/it/corporateresponsibility/supplychainworkingconditions/supplychainmonitoring/whatwedoifwediscoverchildlabour__monotoringarticle4.nhtml

10.“Wie ein starker Euro das Geschäft nicht schwächt“, Financial Times Deutschland; http://www.ftd.de/unternehmen/industrie/:Wie%20Euro%20Gesch%E4ft/296159.html

11.“Wirtschaftswunder Jucu“, Tagblatt (Switzerland); http://www.tagblatt.ch/aktuell/wirtschaft/tb-wi/art149,54004

12.„Ebays neue Mehrwertsteuer“; http://www.wortfilter.de/News/news1893.html

13.Prices of shares; www.cortalconsors.de


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