Types Of International Organizations

Basically, an "international company" is any company that operates internationally, but we have a variety of terms to designate different types of operations. Companies can work together on an international basis in any number of ways, including joint ventures, licensing agreements, management contracts, minority ownership, and long-term contractual arrangements. The term collaborative arrangements can be used to describe all of these types of operations. The term strategic alliance is sometimes used to mean the same thing, but it's often reserved to refer either to an agreement that's of critical importance to one or more partners or to an agreement that does not involve joint ownership.

Multinational Enterprises A multinational enterprise (MNE) takes a worldwide view of markets and production; in other words, it's willing to consider market and production locations anywhere in the world. The true MNE typically uses most of the modes of operations we've described in this lecture. However, because it isn't always easy to determine if a company really takes a "worldwide view," experts have devised some narrower definitions of an MNE. Some people argue, for instance, that an MNE must have direct investments in a minimum number of countries.

Does Size Matter? Some definitions require a certain size – usually giant size. A small company, however, can take a worldwide view and adopt any of the operating modes that we've discussed, even while remaining within its resource capabilities. This is often the case with what we've called bom-global companies. Of course, born-global companies usually start out as small companies, but if they are successful, they become large companies. VistaPrint is a good example. Founded in the late 1990s, it now maintains two-thirds of its workforce outside the United States, sells in 120 countries, and has a capitalization of over a billion U.S. dollars.

MNCs and TNCs Today, most writers apply the term MNE to any company with operations in more than one country. This is the definition we use in this text. The term multinational corporation or multinational company (MNC) is often used as a synonym for MNE. At the United Nations, the term transnational company (TNC) is used interchangeably with MNE.

WHY INTERNATIONAL BUSINESS DIFFERS FROM DOMESTIC BUSINESS

Now that we've explained the modes by which companies operate internationally, let's turn to the conditions in a company's external environment that may affect those operations. Smart companies don't form international strategies – or develop the means to implement them – without examining the dimensions of the external environment indicated in the left-hand side of Figure 1. As you can see, we've organized these dimensions, or factors, into the following categories:

· Physical factors (such as a country's geography) and social factors (such as its politics, law, culture, and economy)

· Competitive factors (such as the number and strength of a company's suppliers, cus­tomers, and rival firms)

In examining both categories, we delve into the realm of the social sciences, which is extremely helpful in explaining how external conditions affect patterns of behavior in different parts of the world.

Physical And Social Factors

Physical and social factors can affect the ways in which companies produce and market products, staff operations, and even maintain accounts. In the following sections, we focus on five key factors: geographic, political, legal, behavioral, and economic. Remember that any of these factors may require companies, if they are to operate efficiently, to alter how they operate abroad compared to how they operate domestically.

Geographic Influences Managers who are knowledgeable about geography are in a position to determine the location, quantity, quality, and availability of the world's resources, as well as the best way to exploit them. The uneven distribution of resources throughout the world accounts in large part for the fact that different products and services are produced in different parts of the world.

Again, take sports. Norway fares better in the Winter Olympics than in the Summer Olympics because of its climate, and except for the well-publicized Jamaican bobsled team (whose members actually lived in Canada), tropical countries don't even compete in the Winter Olympics. The reason East Africans tend to dominate distance races is, at least in part, that they can train at higher altitudes than most other runners.

Geographic barriers – mountains, deserts, jungles, and so forth – often affect commu­nications and distribution channels in many countries. And the chance of natural disas­ters and adverse climatic conditions (hurricanes, floods, earthquakes, tsunamis) can make investments riskier in some areas than in others, while affecting global supplies and prices. (Again, we can look ahead to our ending case, which shows that cruise-line operators must adjust their ports-of-call when hurricanes threaten.)

Finally, population distribution and the impact of human activity on the environment may exert strong future influences on international business, particularly if ecological changes or regulations force companies to move or alter operations.

Political Policies It should come as no surprise that a nation's political policies influence the ways in which international business takes place within its borders (indeed, whether it will take place). We can turn again to the sports arena to see how politics can affect international operations in any industry. Did you know that Cuba once had a minor-league baseball franchise? That arrangement went the way of diplomatic relations between Cuba and the United States back in the 1960s, but several Cuban baseball players are now members of professional U.S. teams. However, most of them had to defect from Cuba to play abroad.

Obviously, political disputes – particularly those that result in military confronta­tion – can disrupt trade and investment. Even conflicts that directly affect only small areas can have far-reaching effects. The terrorist bombing of a hotel in Indonesia, for instance, resulted in the loss of considerable tourist revenue and investment capital because both individuals and businesses abroad perceived Indonesia as too risky an environment for safe and profitable enterprises.

Legal Policies Domestic and international laws play a big role in determining how a company can operate overseas. Domestic law includes both home- and host-country regulations on such matters as taxation, employment, and foreign-exchange transactions. Singapore law, for example, determines how the local Man U's Red Cafe is taxed, how its revenues can be converted from Singapore dollars to British pounds, and even which nationalities of people it employs. Meanwhile, British law determines how and when the earnings from Man U's Singapore operations are taxed in the United Kingdom.

International law – in the form of legal agreements between the two countries – determines how earnings are taxed by both jurisdictions. Mainly as a function of agree­ments reached in international forums, international law may also determine how (and whether) companies can operate in certain places. As we point out in our closing case, for example, international agreement permits ships' crews to move about virtually anywhere without harassment.

Finally, the ways in which laws are enforced also affect a firm's foreign operations. Most countries, for example, have joined in international treaties and enacted domes­tic laws dealing with the violation of trademarks, patented knowledge, and copy­righted materials. Many, however, do very little to enforce either the treaties or their own laws. That's why companies must make a point not only of understanding treaties and laws but also of determining how fastidiously they're enforced in different countries.

Behavioral Factors The related disciplines of anthropology, psychology, and sociology can help managers better understand values, attitudes, and beliefs in a foreign environment. In turn, such understanding can help managers make operational decisions in different countries.

Let's return once again to our opening case. We stressed that although professional sports are spreading internationally, the popularity of specific sports differs among coun­tries. Interestingly, these differences affect the way in which the U.S. film industry treats sports as subject matter. As a rule, U.S. producers spare no expense to ensure that movies generate the greatest possible international appeal (and revenue). When it comes to sports- themed movies, however, they typically cut costs. Why? Because people in one country are usually lukewarm about other countries' sports, moviemakers see little point in spending extra money trying to attract foreign audiences and revenues with these films.

While we're on the subject, we should point out that sports rules sometimes differ among countries. The Japanese do care about U.S. baseball, but Japanese culture values harmony more than U.S. culture does, and U.S. culture values competitiveness more than the Japanese culture does. This difference is reflected in different baseball rules: Whereas the best possible outcome of a baseball game in Japan is a tie, Americans prefer that a game be played out until there's a winner.

Economic Forces Economics explains why countries exchange goods and services, why capital and people travel among countries in the course of business, and why one country's currency has a certain value compared to another's. Players from the Dominican Republic form the largest share of non-U.S.-born players, but even though baseball is quite popular in the Dominican Republic, the idea of putting a major-league baseball team there simply isn't feasible. Why? Because too few Dominicans can afford the ticket prices necessary to support a team. Obviously, higher incomes in the United States and Canada permit higher baseball salaries that attract Dominican players to major-league teams.

Economics also helps explain why one country can produce goods or services less expensively than another. In addition, it provides the analytical tools to determine the impact of an international company's operations on the economies of both host and home countries, as well as the impact of the host country's economic environment on a foreign company.

The Competitive Environment

In addition to its physical and social environments, every globally active company oper­ates within a competitive environment. Figure 1 highlights the key competitive factors in the external environment of an international business – product strategy, resource base and experience, and competitor capability.

Competitive Strategy for Products Most products compete by means of cost or differentiation strategies. A successful differentiation strategy usually takes one of two approaches:

· Developing a favorable brand image, usually through advertising or from long-term consumer experience with the brand; or

· Developing unique characteristics, such as through R&D efforts or different means of distribution.

Using either approach, a firm may mass-market a product or sell to a target market (the latter approach is called a focus strategy). Different strategies can be used for dif­ferent products or for different countries, but a firm's choice of strategy plays a big part in determining how and where it will operate. Take Fiat, an Italian automobile brand that competes in most of the world largely with a cost strategy aimed at mass- market sales. This strategy has influenced Fiat to locate engine plants in China, where production costs are low, and to sell in India and Argentina, which are cost-sensitive markets.

Interestingly, Fiat also owns Ferrari, which competes with a focus strategy to very high-income consumers. Whereas the competitive characteristics of the U.S. market have not been conducive to a mass-market Fiat brand strategy, Fiat sells over a quarter of all its Ferraris in the United States. With Fiat's investment in Chrysler, it plans to also sell the Fiat 500 (a sort of boutique car) with a focus strategy through Chrysler distributors, mainly on the U.S. East and West Coasts.

Company Resources and Experience Other competitive factors are a company's size and resources compared to those of its competitors. A market leader, for example – say, Coca-Cola – has resources for much more ambitious international operations than a smaller competitor like Royal Crown. Royal Crown sells in about 60 countries, whereas Coca-Cola sells in over 200.

In large markets (such as the United States), as compared to small markets (such as Ireland), companies have to invest many more resources to secure national distribution. (And even then, they'll probably face more competitors: In a European country, for example, especially in retailing, a firm is likely to face three or four significant competi­tors, as opposed to the 10 to 20 it will face in the United States.)

Conversely, a company's national market share and brand recognition have a bearing on how it can operate in a given country. A company with a long-standing dominant market position uses operating tactics quite different from those employed by a new­comer. Remember, too, that being a leader in one country doesn't guarantee being a leader anywhere else. In most markets, Coca-Cola is the leader, with Pepsi-Cola coming in a strong second; in India, however, Coke is number three, trailing both Pepsi and a locally owned brand called Thums Up.

Competitors Faced in Each Market Finally, success in a market (whether domestic or foreign) often depends on whether your competition is also international or local. Commercial aircraft makers Boeing and Airbus, for example, compete only with each other in every market they serve. Thus what they learn about each other in one country is useful in predicting the other's strategies elsewhere. In contrast, the British grocery chain Tesco faces different competition in almost every foreign market it enters.