International business: the new bottom line
Bruce Kogut is a professor of management and codirector of the Reginald H. Jones center at the Wharton School, University of Pennsylvania. In his article, “International business: the new bottom line” which he writes for Foreign Policy he looks at the importance of firms to pursue international business and the factors that help shape what doing business in that manor is all about. In the world today, multinational corporations are more likely to guide foreign policy than follow it.
This is evident because according to Kogut, they tend to dominate trade and world production, where international business focuses on how managers deal with their employees in the very different cultural marketplaces. Kogut then breaks the article into sections; why invest in another country, what it takes to be multinational, recognizing competitive advantage, technology and its life cycle, and the global division of mental labor. It is important to look at each of these segments to understand why international business is the new bottom line.
The first reason according to Kogut to invest in another country deals with the differences in the rates of return to capital among countries. This helps to explain why money moves across the borders of countries. Exchange rates are a huge factor when doing business internationally, and when they are favorable for you firm you have a greater opportunity to earn more money. Many firms solely go international because they sought after higher rates of return on invested capital. Second the firm must believe there is an additional advantage that outweighs the added costs of operating in an unknown foreign market. This helps to explain why foreign direct investment is important. It helps as the controlling ownership of assets by foreign private firms or individuals.
Location is important when looking at what it takes to be a multinational. Most firms try to find a good location, one where only few competitors dominate sales in that foreign market. When a firm decides to move into this new market it is because they have some advantage, usually brand label and technology. John Dunning, a professor at the University of Reading in England coined the “OLI” acronym. This stands for ownership, location, and internalization. Ownership means that a firm must have something going for them that the competition does not, like brand label or image.
Location is almost common sense, meaning that a firm will locate in an area that gives them cheap labor to cut down on production costs. And finally, internalization deals with the importance of technology, many times firms will move into new markets and grant licenses for their technology while collecting various types of payment, usually fees and royalties. However, Kogut provides us with this insight about technology, “Technical change occurs so frequently these days that transferring current technology – without including the capability to improve it – is not a threat in the future.”
One of the most important competitive advantages a firm has when it goes international is its ability to arbitrage, meaning profiting from the differences in costs and prices across borders. That being said, it makes sense not just to produce where it is cost efficient but also important to realize profits where the tax rates are lower. This is where arbitrage becomes important. A simple example is to look at how the American dollar is compared to the value of the Japanese Yen. The 90% appreciation of the Yen shows that it is now almost twice as expensive to produce a product in the United States and sell it in Japan.
Next, Kogut explains that it is important to look at technology and its life cycle. The cycle was thought of as simple, innovation begins in the firms home market and then is moved to an international market. It is here in this foreign market where this innovation gets reproduced. Here again location is important, because the technology is going to make that third world country more advanced. For example, why should firms in Japan wait for Sun Microsystems to come to them. Japanese firms realize that the technology for this market is in Silicon Valley, so they understand they need to invest directly in Silicon Valley. No one can really explain why certain knowledge is created in certain places, but just by being there it will help foster a firms ability to innovate.
Finally, Kogut takes a look at the importance of the global division of labor. No longer do auto firms look only to Detroit for their businesses. For instance, cars need to be designed, and the best designers reside in Newport Beach, California – so no the automakers are looking globally for their talent. When it comes to machine tools and quality, many firms look to Italy where this is done best. When firms need high-grade steel, they most look to Germany and Korea.
Managers play a huge role in international business as the bottom line. The decisions one must make when going international are not easy. There are many factors and areas to consider. Kogut helps explain each of these areas. In why should firms move to another country, here is where a manager has to have vision for his firm. If he decides the wrong country, everything could go wrong. He must use his core competencies when making this decision, because whatever his firm does best is going to make them the most successful in that new market when it comes to sales. Also, not every firm can just become multinational. Like stated before, a manager must have vision. Ownership, location, and internalization is key here.
The manager must take ownership of his decisions and select a location that is favorable to all. The bottom line is that by moving where the labor rates are cheaper, employees in the host country are going to lose jobs. Now this manager must “be the bad guy” because he has found a way to make business more profitable. This is seen everyday in today’s economy. Many firm are moving production to Mexico and China and the bottom line result is Americans are losing jobs. As well are Europeans in high advanced countries.
When it comes to recognizing the competitive advantage managers of a multinational firm must understand that the good nature of their operations provided an important advantage. This is because the managers pursued a global strategy and even while conflicting with government regulations it improved economic progress for all. Another factor that manager must be aware of is how their suppliers will function when the move to a new market. For example, when McDonalds moved into Russia they knew it would be important to buy their suppliers, so they could provide a quality product for the end customer, the consumer.
Also, when bringing technology into a third world country it is important for the managers to establish relationships with the government. The bottom line is that not only will it affect the economy, it will also foster better technology in that country. This will add to the important of information, and information is power. It is the manager’s responsibility to show how the technology will better the country. This will invoke the government to back the project, thus creating a win-win situation for the country and the company.
MY OPINION OF ARTICLE
I thought this was a very well written article and correctly titled. I am a bottom line person, and this article explains the bottom line factors when pursuing international markets. Some factors are important and some are not. The author, Bruce Kogut, does a great job of letting you what it is that is important to going international. He always does an excellent job of explaining the benefits of being an international firm. More and more firms in this day in age are just becoming international, over moreover becoming even more international.
For example, when I was working for GE in the sales office we had people in India literally working on our job quotes while we were at home sleeping. The only thing that I did not care for was the use of wording in this article. Often his points seemed unclear at times and then followed by a question. I think that was written for a more mature audience, people who have had international experience where I have not. To often did Kogut end a point with a question and I was forced to re-read and figure out what he was trying to say.