Chapter 2: Outside

home country
The Nature of Doing Business Globally
▪ Exports of goods and services from the United States account for only 13.5 percent of U.S.
gross domestic product, so the nation is still largely a domestic, continental economy. What
happens inside the United States largely determines the strength of the economic recovery.
▪ In contrast, as a percent of gross domestic product (GDP), exports comprise 45.6 percent of the
German economy, 22.6 percent of the Chinese economy, and 187 percent of the Singapore
economy. Singapore’s number is so high because it imports oil and other products and then
re-exports them globally.
▪ A point here is that the United States has substantial room for improvement in doing business
globally based on the 11 percent exports to the GDP number.
A Comprehensive
Strategic-Management Model
Source: Fred R. David, adapted from “How
Companies Define Their Mission,” Long
Range Planning 22, no. 3 (June 1988): 40,
© Fred R. David.
Globalization
▪ Globalization is a process of doing business worldwide, so strategic decisions are made based
on global profitability of the firm rather than just domestic considerations. A global strategy
seeks to meet the needs of customers worldwide, with the highest value at the lowest cost. This
may mean locating production in countries with the lowest labor costs or abundant natural
resources, locating research and complex engineering centers where skilled scientists and
engineers can be found, and locating marketing activities close to the markets to be served.
▪ A global strategy includes designing, producing, and marketing products with global needs in
mind, instead of considering individual countries alone. A global strategy integrates actions
against competitors into a worldwide plan. Today, there are global buyers and sellers and the
instant transmission of money and information across continents.
5 largest revenue company
Advantages of Doing Business Globally
Potential advantages to initiating, continuing, or expanding international operations are as follows:
1. Firms can gain new customers for their products.
2. Foreign operations can absorb excess capacity, reduce unit costs, and spread economic risks over a wider
number of markets.
3. Foreign operations can allow firms to establish low-cost production facilities in locations close to raw
materials or cheap labor.
4. Competitors in foreign markets may not exist, or competition may be less intense than in domestic markets.
5. Foreign operations may result in reduced tariffs, lower taxes, and favorable political treatment.
6. Joint ventures can enable firms to learn the technology, culture, and business practices of other people and
to make contacts with potential customers, suppliers, creditors, and distributors in foreign countries.
7. Economies of scale can be achieved from operation in global rather than solely domestic markets.
Larger-scale production and better efficiencies allow higher sales volumes and lower-price offerings.
8. A firm’s power and prestige in domestic markets may be significantly enhanced if the firm competes
globally. Enhanced prestige can translate into improved negotiating power among creditors, suppliers,
distributors, and other important groups.
Disadvantages of Doing Business Globally
There are also numerous potential disadvantages of initiating, continuing, or expanding business across
national borders, such as the following:
1. Foreign operations could be seized by nationalistic factions.
2. Firms confront different and often little-understood social, cultural, demographic, environmental,
political, governmental, legal, technological, economic, and competitive forces when doing business
internationally. These forces can make communication difficult in the firm.
3. Weaknesses of competitors in foreign lands are often overestimated, and strengths are often
underestimated. Keeping informed about the number and nature of competitors is more difficult when
doing business internationally.
4. Language, culture, and value systems differ among countries, which can create barriers to
communication and problems managing people.
5. Gaining an understanding of regional organizations such as the European Economic Community, the
Latin American Free Trade Area, the International Bank for Reconstruction and Development, and the
International Finance Corporation is difficult but is often required in doing business internationally.
6. Dealing with two or more monetary systems can complicate international business operations.
The Global Challenge
▪ Few companies can afford to ignore the presence of international competition. Firms that seem
insulated and comfortable today may be vulnerable tomorrow; for example, foreign banks do not yet
compete or operate in most of the United States, but this too is changing. Thomson Reuters annually
compiles a list of the world’s most innovative companies, using metrics that include patent activity,
R&D investment, success rate, globalization, and influence.
▪ For the first time ever, Japan (39%) overtook the United States (36%) in 2014 as having the most
innovative companies in the world. Top U.S. firms making the list included Apple, Lockheed Martin,
Google, Microsoft, Intel, and IBM, whereas some top Asian companies on the top-100 list included
Samsung, Fujitsu, Hitachi, Canon, and for the first time, a Chinese company, Huawei.
▪ Apple, Alphabet, Amazon, Microsoft and Samsung, are considered the five most innovative
companies, according to BCG's analysis of the 50 most innovative companies of 2020.
▪ More and more countries around the world are welcoming foreign investment and capital. As a result,
labor markets have steadily become more international. East Asian countries are market leaders in
labor-intensive industries, Brazil offers abundant natural resources and rapidly developing markets,
and Germany offers skilled labor and technology
▪ Other considerations include the cost of energy, availability of resources, inflation rates, tax
rates, and the nature of trade regulations.
▪ Protectionism refers to countries imposing tariffs, taxes, and regulations on firms outside the
country to favor their own companies and people.
▪ Advancements in telecommunications are drawing countries, cultures, and organizations
worldwide closer together. Foreign revenue as a percentage of total company revenues already
exceeds 50 percent in hundreds of U.S. firms (ExxonMobil, Gillette, Dow Chemical, Citicorp,
Colgate-Palmolive, and Texaco).
▪ Shareholders and investors expect sustained growth in revenues from firms; satisfactory
growth for many firms can only be achieved by capitalizing on demand outside the United
States. Joint ventures and partnerships between domestic and foreign firms are becoming the
rule rather than the exception.
How Do Firms Decide Where
to Expand?
▪ Considerable prior research has examined the relative attractiveness of various countries to
expand operations, quite often from a “need to exploit resources in host countries” perspective.
▪ A recent article focused on the nature of institutions, such as schools, laws, and health care,
rather than resources, such as oil, gas, minerals, and labor, in the decision to expand operations
to other countries.
▪ Arregle and colleagues report that it does indeed matter which region(s) are chosen for
expansion.
▪ More specifically, Arregle and colleagues have found that companies seek to expand primarily
to regions that have institutions similar to their own institutions, or at least similar to the
institutions in other regions where the firm already has operations.
▪ The “institutions factor” may be more important than the “resources factor” in
internationalization decisions

Source: Based on Jean-Luc Arregle, Tuyah Miller, Michael Hitt, and Paul Beamish, “Do Regions Matter?” An Integrated Institutional and
Semi- Globalization Perspective on the Internationalization of MNEs,” Strategic Management Journal 34 (2013): 910–934.
American Versus Foreign Business Culture
▪ Rose Knotts summarized some important cultural differences between U.S. and foreign
managers. Awareness and consideration of these differences can enable a manager to be more
effective, regardless of his or her own nationality;
1. Americans place an exceptionally high priority on time, viewing time as an asset. Many
foreigners place more worth on relationships. This difference results in foreign managers
often viewing U.S. managers as “more interested in business than people.”
2. Personal touching and distance norms differ around the world. Americans generally stand
about three feet from each other when carrying on business conversations, but Arabs and
Africans stand about one foot apart.
3. Family roles and relationships vary in different countries. For example, males are valued
more than females in some cultures, and peer pressure, work situations, and business
interactions reinforce this phenomenon.
4. Business and daily life in some societies are governed by religious factors. Prayer times,
holidays, daily events, and dietary restrictions.
5. Time spent with the family and the quality of relationships are more important in some
cultures than the personal achievement and accomplishments espoused by the traditional
U.S. manager.
6. Many cultures around the world value modesty, team spirit, collectivity, and patience much
more than competitiveness and individualism, which are so important in the United States.
7. Americans often do business with individuals they do not know, unlike businesspersons in
many other cultures. In Mexico and Japan, for example, an amicable relationship is often
mandatory before conducting business