Section 5.  International Business



Target Questions:

1. What is a multinational corporation?

2. What is a branch?

3. What is an affiliate?

4. What is foreign direct investment?

5. What is a greenfield investment?

6. What is the origin of multinational corporations?

7. What are advantages/disadvantages of multinational corporations?

 

Multinational Corporation (MNC), sometimes called transnational corporation or international corporation, business that produces or distributes products or services in one or more foreign countries by establishing a branch or affiliate there. A branch is a part of a company that is located in another country. An affiliate is a company partially or entirely owned by another company. MNCs engage in foreign direct investment (FDI) – that is, investment in one country by citizens of another country. Sometimes such investment involves acquiring an existing company. In other cases MNCs undertake what is known as greenfield investment by creating new facilities or activities.

The MNC has its origin. Usually it is the outgrowth of the great trading companies of the 17th and 18th centuries. In 1811 the New York statute said corporations could be created by the filing of documents. After that it became a matter of bureaucratic operations to become a corporation. By 1850 it was a very common thing in the United States and was under general statute in European countries as well. Since that time the corporate movement began. As the jet plane, satellite communications and computers began, it became possible for a company to control business in all the world.

Nowadays most MNCs are very large corporations based in developed countries. About half of the 600 largest MNCs have headquarters in the United States, about a sixth are based in Japan, and about a tenth are in Great Britain. An increasing number of MNCs now originate from the newly industrialized and developing areas, including Hong Kong and South Korea. These developments have been aided by technological improvements in transportation, communications, and production processes.

The tremendous growth and spread of MNCs has sparked controversy. Some people believe that MNCs contribute to unemployment in the country where they are based by hiring foreign workers for overseas branches or affiliates. Some people also believe MNCs exploit the people and resources of other countries. However, others argue that MNCs create more jobs than they eliminate and that MNCs bring capital and technology to areas that need it.

The growth of international corporate operations is faster than the economic growth of the industrialized nations. There are some projects which predict that within a generation almost a half of the free worlds production will be internationalized.

 

Activity 1. International Business

Read the following article.

 

THE NATURE OF INTERNATIONAL BUSINESS

There are many different forms and levels of international business that organizations can engage in, and it is difficult to draw sharp lines of distinction between them. But for discussion purposes, we shall identify three general forms. They are shown in Figure 1.

 

Levels of International Business Activity:

 


         High       Multinational business    

 

 

                          International business    

 

 

                           Domestic business    

         Low

Figure 1

 

As illustrated in Figure 1, a domestic business acquires essentially all of its resources and sells all of its products or services within a single country. An international business is primarily based in a single country but acquires some meaningful share of its resources or revenues from other countries. A multinational business transcends national boundaries – it has a world-wide marketplace from which it uses raw materials, borrowsmoney, manufactures its products, and to which it subsequently sells its products.

Ford is an excellent example of a multinational company. It has design and production facilities around the world. The new Mercury Tracer was designed and engineered in Japan, manufactured in Mexico, and sold in the United States. Ford makes and sells cars in Europe that are never seen in the United States. Ford cars are designed, produced and sold for individual markets, wherever they are and without regard for national boundaries.

More and more companies are following this path. Domestic companies are becoming international, and international companies are becoming multinational. This pattern is prompting the evolution of a worldwide phenomenon called globalization – the evolution of an integrated global economy that comprises interrelated markets.

Thirty-five years ago, when anyone in the world wanted to buy an automobile, an electronic instrument, or a machine tool, there was fundamentally only one place to shop – in the United States. After the Second World War, the United States was by far the dominant economic force in the world. Virtually all the countries in Europe had been devastated during the war. Asian countries, including Japan, China, and Korea, had fared no better. There were few passable roads, few standing bridges, and even fewer factories dedicated to the manufacture approach to foreign markets and production. They search for opportunities all over the world and select the best strategy to serve each market In some settings, they may use direct investment, in others licensing, in others joint ventures; in still others they might limit their involvement to exporting and importing.

There are several examples of these truly global companies. Nestle, for example, is a Swiss firm that obtains only 3 percent of its sales from the Swiss market CIBA-Geigy, a Swiss pharmaceutical firm, obtains only 6 percent of its sales from a domestic market. US firms such as Ford, IBM, Coca-Cola, Pepsi, and McDonald's tend also to have a global character.

International business has grown to be one of the most important features of the modem world-wide economy. Learning to operate in a global economy is a significant challenge facing many managers today.

Many of the challenges of international management are unique issues associated with the international context. These difficulties reflect the economic, political, and cultural environments of international management.

The world of international business is complex, but it is possible to describe its structure through four types of countries that dominate tile world economy – industrial market economies, developing nations, oil exporting nations, and Eastern non-market economies.

International business is growing, but not all products or businesses should be moved in an international direction. The decision to adopt a global or nationally focused strategy depends upon both market and technological considerations. Personal values also come into play.

Even if a decision is made to enter the international arena, managers still have several options, including importing and exporting, licensing, joint ventures, and direct investment. Firms that choose among these options the best ways to enter a broad range of different countries can be thought of as truly global companies.

One of the most common forms of international business is to import or export merchandise. Importing is particularly prevalent in the retailing industry. Companies have legions of buyers who scour the world, looking for merchandise to import. Smaller companies handle imported goods, although they may purchase them through wholesalers rather than directly from suppliers abroad.

Companies that want to export their products may do so directly by calling on potential customers overseas, or they may rely on intermediaries here or abroad. Working through someone with connections in the target country is particularly attractive to small companies and to those with little experience in international business. But many countries now have foreign trade offices that help importers and exporters interested in doing business within their borders.

Although many mechanisms exist for promoting the growth of international business, there are also many barriers – both cultural and political – to doing business abroad. At the same time, many leaders in government and business are doing what they can to break down those barriers.

Advertising aims to inform consumers about products. It may also entertain them in the process. When people refer to advertising, they are usually talking about TV advertising. People have the false impression that advertising is not very informative. But the newspapers are full of information about products, prices, features, and more. Each day consumers receive minicatalogues in their newspapers or in the mail that tell them what is on sale, where, at what price, for how long, and more. Thus advertising is informative First we learn about new products, new features, sale items, and more. But we also benefit from free radio and TV and subsidized newspapers and magazines. In short, advertising does not only inform us about products but pays for us to watch TV and get the news from magazines and newspapers.

Newspapers and radio are especially attractive to local advertisers. Television has many advantages to national advertises, but it is expensive. The cost of 1 minute of advertising during the telecast of the "Super Bowl" has increased to exceed $ 1 million.

 

Exercise 1.   Answer the following questions.

1. What does domestic business acquire?

2. What is international business based on?

3. What do you know about multinational business?

4. Why can we say Ford is an example of a multinational company?

5. What is globalization?

6. How can you describe the structure of international business?

7. What is one of the most common forms of international business?

8. What is the function of intermediary?

9. What do you know about advertising?

Exercise 2.       Match the terms with their definitions.

 

1. Domestic business   a. one that is primarily based in a single country but which acquires some meaningful share of its resources and/or revenues from other countries.

2. International business b. one that acquires all of its resources and sells all of its products or services within a single country.

3. Multinational business c. the evolution to an integrated global economy comprised of interrelated markets.

4. Globalization             d. one that transcends national boundaries – it has a worldwide marketplace from which it buys raw materials, borrows money, and manufactures and sells its products.

Exercise 3.       Match the collocations with the word ‘activity’ with their translation.

 

1. advisory activity        a. безприбуткове (некомерційне) підприємство

2. budgeted activity      b. загальна ділова активність

3. business activity       c. повсякденна активність

4. commercial activity   d. діяльність, передбачена в бюджеті

5. competitive activity   e. діяльність, пов’язана з ризиком

6. day-to-day activity    f. економічна діяльність з метою отримання прибутку

7. non-profit activity      g. консультаційна діяльність

8. overall business activity h. економічна (ділова) активність

9. profit-seeking activity i. комерційна діяльність

10. risky activity             j. конкурентна боротьба

 

Exercise 4.       Read the following interview. Fill in the gaps in the sentences with the words from the box.

 

Here is an interview between a journalist and a Finance Minister.

J: Has the policy of the government changed?

M: No, we are working towards increasing the quality of services and making the economy strong.

J: What do you predict as a level of inflation over the next 12 months?

M: Inflation will continue at present levels – about 2.5 per cent.

J: Are you confident that economic growth will remain strong? .

M: Economic growth is now at 2 per cent and should rise to 4 per cent over the coming year.

 

rise      predict         continue        ask change say                work

 

_______if the policy of the government_______, the Minister _______ the government _______ towards increasing the quality of services and making the economy strong. He _______ that inflation _______ at present levels – around 2.5 per cent – and economic growth, now at 2 per cent, _______ to 4 per cent.

 

Exercise 5.       Read and reproduce the following dialogue in reported speech.

 

In the following extract members of the Board of a company are discussing the company strategy.

 

Fox: Since our main objective is to gain market share, I believe we must first of all reduce our prices.

Brown: But if we reduce prices, that will cut our profits.

Fox: That's right, but we can slowly increase production, which will eventually enable us to cut unit costs.

Smith: That's really a long-term prospect. Unit costs can only come down if we invest in new plant and machinery. I personally think we should go for higher profitability. If we upgrade the product, we can charge higher prices and get larger profits.

Fox: Look, the market is already very competitive. If we increase prices, whatever the quality, the market will immediately respond and sales will drop rapidly. But if we reduce costs in manufacturing, that will put us in a strong position to adapt to the market.

 

Exercise 6.       Read the following quotations. Explain them in your own words.

1. I don't know the key to success, but the key to failure is trying to please everybody. (Bill Cosby)

2. The two hardest things to handle in life are failure and success. (Unknown)

3. I think of life as a good book. The further you get into it, the more it begins to make sense. (Harold S. Kushner)

4. Education's purpose is to replace empty mind with an open one. (Malcolm S. Forbes)

 

 


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