International Business Case Study

Over the next 50 years, changes in the relative performance, scale, and scope of the world’s economies will be dramatic. Most notably, data indicate that the combined economies of Brazil, Russia, India and China—the so-called BRICs—should surpass those of the G7 nations by 2050 [see Fig. 4. 5]. In fact, of the original G7 nations, only Japan and the United States will still rank among the world’s largest economies at that time.

Thus, managers need to rethink their traditional views of the economic environment as they encounter fundamental shifts in investment and spending, increasing competition for inputs in the world’s commodity markets, and the rapid growth of consumer markets in many transition economies.

Other significant impacts loom as the leaders of the BRIC nations seek to collectively develop their economies and political presence through the creation of a multilateral alliance amongst themselves.

No matter what the outcome, the fallout will be momentous as the world’s emerging economies come into their own.

Questions 1. Debate the relative merits of GNI per capita versus the idea of purchasing power and human development as indicators of economic potential in Brazil, Russia, China, and India. Gross national income per capita (GNI per capita) represents the market value of all final goods and services newly produced in an economy by a country’s domestically-owned firms in a given year divided by its population.

Thus, GNI per capita serves as a very useful indicator of current individual wealth and consumption patterns; those countries with high populations as well as high per capita GNI are most desirable in terms of total market potential.

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Purchasing power parity (PPP) represents the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market that one unit of income would buy in another country. PPP is estimated by calculating the alue of a universal “basket of goods” that can be purchased with one unit of a country’s currency and thus serves as a useful indicator of international differences in prices that are not reflected by nominal exchange rates. The Human Development Index measures life expectancy, education (primarily the adult literacy rate), and income per person and is designed to capture long-term progress rather than short-term changes. Thus, by combining indicators of real purchasing power, education, and health, the index provides a comprehensive measure of a country’s standard of living that incorporates both economic and social variables. . Map the proposed sequence of the evolution of the BRIC’s economies. What indicators might companies monitor to guide their investments and organize their local market operations? The BRIC’s economies are on the verge of the rapid growth of their consumer markets. (Experience indicates that consumer demand takes off when GNI per capita reaches levels between $3,000 and $10,000 per year. ) In Russia there is already significant evidence of the growth of consumerism during the past decade. There are also early signs of similar trends in China and India, where the growth of their middle classes is very rapid.

It is expected that within a decade or so, each of the BRICs will show higher returns, increased demand for capital, and stronger national currencies. Thus, foreign firms will want to monitor major economic indicators such as GNI, PPP, and the Human Development Index, as well as developments in the cultural, political, and legal environments of those nations. 3. What are the implications of the emergence of the BRICs to careers and companies in your country? Responses will vary according to the level of economic development and the economic basis of a student’s home country.

Those students from industrialized nations may feel challenged and express the fear of a decline in their standards of living due to increased pressures in the labor market and the declining cost competitiveness of their countries’ firms. On the other hand, students from developing countries may be hopeful that their countries will be able to successfully generate and/or compete for the investment capital and those business activities that lead to significant economic growth and the increasing lobal competitiveness of their countries’ firms. How-ever, there is ample room for exceptions to these feelings, given the present and future comparative advantages of particular nations. Chapter FIVE GLOBALIZATION AND SOCIETY CLOSING CASE: Anglo American in South Africa Anglo American PLC is a mining conglomerate that operates in 61 countries via eight key businesses. Founded in 1917 as the Anglo American Corp. of South Africa and now headquartered in London, Anglo American is the largest producer of gold in the world.

With a South African workforce of more than 90,000 employees in its primary operations and another 44,000 spread across its subsidiaries, the firm is one of the largest in the region. Heavily affected by the HIV/AIDS epidemic, Anglo American was one of the first companies to establish a proactive, comprehensive strategy to combat the raging effects of the disease on its workforce and production systems. Along with many other MNEs, Anglo American also joined the Global Business Council on HIV/AIDS, an organization that focuses on (a) alleviating the effects of AIDS throughout the world and (b) protecting the rights of infected workers.

In response to the failure of its AIDS prevention policy, the company announced in 2001 that it would be running a feasibility study to determine whether it would make antiretroviral treatments available to its workforce. (The prevalence of HIV-positive workers had risen to an average of 21 percent across all of its operations and was increasing by nearly 2 percent annually. ) However, just a year after the announcement, Anglo American decided to abandon the study, citing the risk and the expenses involved as being too great and numerous other factors as being too difficult to manage.

However, the company insisted that it had not completely abandoned the idea of a pilot study and expressed hopes that a more reasonable arrangement could be made involving the entire industry and the South African government. Questions 1. What choices does the government of South Africa have in the face of the HIV/AIDS epidemic? What do you think it should do? South Africa suffers one of the highest rates of HIV infection in the world—approximately 5. 3 million cases in a population of 45 million people. Each day another 1,500 South African people are infected with the virus.

Despite the dire threat posed by the epidemic, the South African government has proved to be one of the least committed to effective intervention. It has diverted little of its budget to dealing with the crisis and has been very resistant to the widespread distribution of antiretroviral drugs on the grounds that such action would be far too expensive and difficult to do effectively. However, the government needs to confront the crisis! It should begin with the development of a health care system and infrastructure adequate to deal with the sheer number of people in need of care.

The government should also seek to partner with international aid agencies, other international organizations, and the private sector, including pharmaceutical firms, to develop a feasible, comprehensive strategy. [Note: student responses to the latter part of the question will vary, given their individual beliefs regarding the role of government in society. ] 2. Why did Anglo American halt its pilot study on the feasibility of providing antiretroviral therapy to its employees?

Do you agree with the decision? What recommendation would you give the company concerning its HIV/AIDS policy? Anglo American claimed that the risk and the expenses associated with the study were too great. In contrast, however, by 1991 Coca-Cola was providing free anti-retroviral drug therapy to 1,500 AIDS-infected employees in Africa, and De Beers (in which Anglo American has a 45 percent stake) was paying 90 percent of the costs of the treatment for its AIDS-infected employees and their spouses.

Given that the company expressed hopes that a more reasonable arrangement could be made involving the entire industry and the government, it appears that Anglo American is attempting to shift at least part of the responsibility for solving the crisis to the government and to other stakeholders. [Again, student responses will vary, given their individual beliefs regarding the role of the private sector in society. ] 3. What role do the pharmaceutical companies play in the HIV/AIDS epidemic in South Africa?

What would you recommend to a pharmaceutical company that produced HIV/AIDS drugs? The pharmaceutical companies have a unique role to play in the HIV/AIDS epidemic in South Africa and throughout the world because they are the source of the drugs with which to combat this plague. However, the enormity of the epidemic is truly daunting. Given the sheer number of people in need, on the one hand, and the utter lack of resources, on the other, one could easily conclude that there is relatively little that can be done to alleviate the suffering and stop the spread of the disease.

Still in all, the pharmaceutical companies can seek to partner with aid agencies, international organizations, governments, and the private sector in their search for acceptable and effective solutions. Pharmaceutical firms will most surely be concerned about the issue of patent protection and generic drugs, as well as the prospect of tiered pricing and significantly lower profit margins. Governments, other members of the private sector, and other stakeholders will all need to be mindful of the tremendous costs and risks that are borne by pharmaceutical firms.

Further, given the extent and the seriousness of the problem, a lack of commitment on the part of any stakeholder will be a serious setback in the march toward a community solution. Chapter SIX INTERNATIONAL TRADE AND FACTOR MOBILITY THEORY CLOSING CASE: LUKoil [See Map 6. 2. ] LUKoil was one of several firms created in 1991 out of Russia’s state-owned petroleum monopoly. While both Russia and LUKoil must export to meet their economic objectives, political relations within and outside of Russia could impair LUKoil’s future ability to export.

Thus, foreign investment and ties to Western oil companies are very important to the firm’s ultimate success. Controlling 19 percent of Russia’s oil production and refining capacity and employing more than 120,000 people in its operations worldwide, LUKoil has become Russia’s largest oil company. It is also the first Russian oil company to integrate from “oil wells to filling stations. ” High market prices have enabled LUKoil to amass sufficient capital to make substantial foreign investments.

While much of its FDI has been directed to nearby countries, LUKoil has also acquired 100 percent of Getty Petroleum in the United States, as well as 800 U. S. stations from ConocoPhillips. Forward integration into filling stations will guarantee LUKoil market access and enable the company to sell its crude oil during times of global oversupply. Further, LUKoil sees its foreign acquisitions as a means of gaining experienced personnel, technology, and competitive know-how to help it compete more efficiently and effectively both at home and abroad.

Questions 1. What theories of trade help to explain Russia’s position as an oil exporter? Which ones do not, and why? Both the theories of absolute and competitive advantage help to explain Russia’s position as an oil exporter. Prices in the global oil market are driven by the laws of supply and demand. Given the fact that Russia now has 15 more proven reserves than Saudi Arabia and its oil companies have become major global competitors, the country enjoys both natural and acquired advantages with respect to oil.

Thus, factor proportions theory is applicable. The fact that a preponderance of its foreign expansion has been to countries of the former Soviet Union supports the country similarity theory. The Porter Diamond of national competitive advantage also helps to explain Russia’s position as an oil exporter. Global demand conditions are favorable; and Russian oil companies are making significant strides in the areas of factors conditions, related and supporting industries, and firm strategy, structure, and rivalry.

Neither the interventionist theory of mercantilism nor the theories of country size apply. Further, product life cycle theory does not apply because petroleum is not an appropriate type of product for that model. 2. How do global political and economic conditions affect world markets and prices of oil? Global political and economic conditions affect world markets and prices because of their real and perceived effects on global supply. In spite of their general upward trend, oil prices have fluctuated widely in response to events during the twenty-first century.

OPEC’s supply quotas, general economic uncertainty, China’s economic expansion, political unrest in Venezuela, and the war in Iraq have all contributed to the favorable market conditions that have led to record-setting prices and profits in the global oil industry. 3. Discuss the following statement as it applies to Russia and LUKoil. “Regardless of the advantages a country may gain by trading, international trade will begin only if companies within that country have competitive advantages that enable them to be viable traders—and they must foresee profits in exporting and importing. Given the globalization of the world’s oil industry on the one hand, and the massive capacity of Russia’s oil producers on the other, it is vital that Russia’s domestic companies have competitive advantages that enable them to operate profitably in global markets. Otherwise, foreign competitors that can do so would be in a position not just to serve the world’s markets, but to enter the Russian market via foreign direct investment, if such action were permissible.

Thus, it is critical that both LUKoil and other Russian oil companies become as efficient as the major global competitors, either by developing or acquiring the latest petroleum technology, marketing skills, and operating efficiencies that will yield the efficiencies required to effectively compete at both the global and local levels. 4. In LUKoil’s situation, what is the relationship between factor mobility and exports? Capital, technology, and skilled employees are all critical factors in the global oil industry.

Even in Russia oil production and processing are capital-intensive activities that require massive amounts of highly valuable and highly specialized capital equipment manned by skilled laborers. Investment naturally flows to those sites where oil is abundant and production activities are the most efficient. Because oil is a limited resource and demand exists the world over, competitors such as LUKoil serve their global customers via production sites that are scattered across the world. Whereas LUKoil’s European customers will likely be served from its

European reserves, other customers are more likely to be served by oil sourced from its holdings in other parts of the world. 5. Compare the role of the Costa Rican government in the chapter’s opening case with the role of the Russian government in their use of trade to meet national economic objectives. The roles of the two governments are quite different in the sense that Costa Rica set about developing acquired advantages in targeted industries, while Russia chose to exploit its given natural resources in order to compete in global export markets as it transitioned to a market-based economy.

Although exports of coffee and bananas are still important to Costa Rica, high-tech manufactured products (electronics, software, and medical devices) are now the backbone of that country’s economy and export earnings. On the other hand, as Russia moved through the transition from a centrally-planned to a market-based economy, it fashioned competitive enterprises such as LUKoil from its state-owned assets. Those firms have since had to rely on their earnings in order to develop or acquire needed products, processes, facilities, and/or employees.