International Business Mode of SABIC - Case Study Example

?SABIC Company (International Business) Table of Contents Introduction 3 Globalisation and International Business 3 Globalisation and International Business of SABIC 4 International Trade Theories 5 Free Trade 5 Theory of Absolute Advantage 6 Theory of Comparative Advantage 6 Application of Theory in SABIC 6 Modes of International Business 7 International Business Mode of SABIC 8 Analysis of SABIC’s International Business 9 9 Conclusion 10 References 11 Introduction Nowadays, people and organisations have expanded their accessibility to resources, markets products and services across extensive geographical fields. They have also been impacted, both in positive as well as negative manner by the circumstances of foreign nations along with the home country. The present world is becoming increasingly interconnected in stimulating and multifaceted ways. Furthermore, the form of business has also changed from traditional times where organisational span is not only limited to domestic markets, rather it has expended to other regions of the world as well (Daniels & et. al., 2012). From the history of international business, it can be learnt that international organisations have been in existence for centuries, but at present these organisations are characterised by explosive growth and close control of foreign business activities. They market the products and services in different ways than their predecessors did. Traditionally, the complex international business transactions were the domain of representatives, global policies and business specialists. Currently, a converging set of strong economic, social and cultural trends demand that every citizen has certain kind of international eloquence and that must be understood by organisations that operate international businesses (Hill, 2010). Based on this aspect, the report describes international business of one multinational organisation namely SABIC. Globalisation and International Business International business encompasses every commercial transaction between parties of two or more nations. The parties can range from private organisations to government entities. In international business, any kind of global measures and competitions have an impact on the trade of almost every organisation, irrespective of their size. The international business environment is quite complex and diverse than the domestic business environment. This international business is influenced by the process of globalisation. Globalisation denotes the on-going social economic and political procedures that inflate the relationship and encompass the interdependencies among people and organisations of various nations (Rugman & Collinson, 2012). The era of globalisation has brought about a rapid increase in the level of international trade and financial integration. There have also been changes in the configuration of trade and product flows. The forces of globalisation are intense and they are impacting the business activities of organisations. The initiations of information and communication technology (ICT) and quick economic liberalisation of business and investment in several nations have augmented the procedure of globalisation. Present market is swamped with not only industrial commodities but also with the items of regular consumption. Every day an average individual utilises such products and services which are from different origins. The increased integration of market, mobility of people with international travel for employment along with internet penetration has virtually transformed the international business (Joshi, n.d.; Tayeb, 2000). Globalisation and International Business of SABIC One prevalent example of globalisation and its impact on international business can be observed from a Saudi Arabian multinational organisation namely SABIC. SABIC is a chemical producer which specialises in manufacturing a variety of chemicals, polymers and fertilisers among others. It was established in the year 1976 and since then the organisation has expanded the business considerably in major regions of the world such as America, Middle East, Africa, Europe and Asia. The globalisation strategy of SABIC comprises exploiting the leading position of the organisation as well as to manufacture the chemical products at low prices. The globalisation tendency introduced by several multinationals has enhanced international communication, market planning and optimisation of products and technology to specific national contexts for SABIC. In order to enhance the international business, SABIC concentrated on capacity development to satisfy the increasing demand of chemical products in emerging economies such as in Asia and Middle East nations. Furthermore, SABIC has used the globalisation process by transferring the technology in the developing nations. Presently, the organisation operates its business in above 40 nations (Singh & Syed, n.d.). International Trade Theories International trade theories provide different understandings regarding the functioning of organisations in international arena. Since business strategies of national and international operations are different, the theories help to clarify the reactions of different multinationals to governmental policies, because the central dissimilarity between national and international business is government intervention (Grosse & Behrman, 1992). Free Trade Free trade is a vital philosophy in the area of international business. Free trade occurs when the government of host nations do not attempt to interfere by different mechanisms such as quota or import duties on multinational organisations. In free trade, people can purchase products from foreign nations and organisations can produce and sell products to different countries as well (Herrmann, 2012). Theory of Absolute Advantage Adam Smith has defined the theory of absolute advantage for explaining the international business. He stated the term ‘absolute advantage’ as the ability of a nation or an organisation to produce more outputs with similar amount of inputs than other nations or organisations. Thus, according to this theory, only organisations having absolute advantage can manufacture products with low cost and thereby can enhance the profit in international market (Schumacher, 2012). Theory of Comparative Advantage The other important theory of international business is the theory of comparative advantage which was established by David Ricardo. According to him, comparative advantage is the capability of an organisation to produce products and services at lower opportunity expenses in comparison with other organisations. This comparative advantage provides the competency to sell products and services at low cost and thus they can enjoy higher sales (Griffin & Pustay, 2007). Application of Theory in SABIC In the international business, SABIC has one significant absolute advantage. Unlike other competitors in the chemical manufacturing industry, SABIC has access to discounted oil and natural gas. As a result, the organisation can manufacture more products by low level of expenses as input. Given the organisation’s planned increase in the capacity of petrochemical products manufacturing and vulnerabilities of international markets the absolute advantage helps SABIC to generate considerable revenue. SABIC has gained higher sales against the other rivals, from its inexpensive access of resources provided by the Saudi Arabian government (Saudi Basic Industries Corporation, n.d.). Moreover, SABIC has also gained comparative advantage through the subsidised feedstock. The subsidised feedstock provides the organisation better cost competitiveness along with helping it to get immune from the market pressure. Given the feedstock and cost advantage of SABIC, the organisation is able to ascertain growth in business in the international market more effectively (Credit Suisse, 2011). Modes of International Business An organisation can involve in international business by various operating modes and one of the important modes is foreign investment. Foreign investment consists of the ownership of foreign assets for the intention of grasping monetary achievements through the way of profits, business growth and market share among others. Foreign investment can be classified into foreign direct investment (FDI) and portfolio investment. FDI takes place when an investor achieves a regulatory interest in foreign business operations (Pearce, 2006). It can occur through sole ownership, i.e. greenfield investment or joint venture. In greenfield investment, the multinational organisation achieves complete control on the business operations in the overseas nation. It can be gained through acquisition or takeover of foreign organisation. On the other hand, in joint venture, two or more than two organisations share the control of business in overseas nation. On the other hand, portfolio investment is regarded as such a business mode which is established in the form of debt or equity. Often organisations use portfolio investment strategy as a part of short-term international business strategy (Eicher & Kang, 2004). International Business Mode of SABIC SABIC has several large scale production affiliates in different regions of the world. Most of them have been developed through the way of joint ventures with foreign partners and very few businesses are done through the way of sole ownership (Al-Otaibi & et. al., 2006). The following figure demonstrates the different international business modes used by SABIC in order to expand the reach. Source: (Singh & Syed, n.d.) SABIC is primarily a government controlled organisation where the state owns about 70% of market share and 30% is owned by private segment. Since the inception, the organisation has been focused on enhancing the business in the Middle East region. Nevertheless, the overall strategy of the organisation is to become one the leading international suppliers of petrochemical products. It has big multinational networks in Saudi Arabia and other key regions of the world. In order to enhance the international business, SABIC has also gone through considerable number of acquisitions as a part of green field investment. The organisation has made considerable investments at domestic and foreign markets. It has acquired many organisations in Europe and America. For example, in 2002, the organisation had acquired DSM’s Petrochemical and in 2005 the Huntsman’s Petrochemical from the UK. These two acquisitions assisted in enhancing the business in Europe. In 2007, SABIC purchased GE Plastics of Netherlands which further strengthened its position in Europe (Alperowicz, 2010). Analysis of SABIC’s International Business The financial performance of SABIC represents its effectiveness in the international business. Irrespective of tough market circumstances, SABIC has maintained strong performance. The net profit of the organisation was about SR 25 billion and the amount of asset of the organisation stood at about SR 338 billion in 2012. With respect to production, the overall production of the organisation increased from 35 million metric tons of different petrochemical products to 69 million metric tons in 2011. With the international business strategies used by SABIC, its capacity has also increased to about 600,000 tons of chemicals in a year. In the international market, SABIC has invested in different projects in order to enhance the business performance (Saudi Basic Industries Corporation, 2012). Conclusion Presently, SABIC has transcended a long way from the beginning of the business in Saudi Arabia. It has promoted and diversified the business operations in various parts of the world. SABIC has also established as a successful and a self-dependent multinational organisation within a short span of time. The organisation has grown its business by way of joint venture, partnerships and other forms of FDI and has become a leading manufacturer of petrochemical products. With respect to the international business strategy, SABIC has started to expand the market in Middle East region. In addition, various acquisitions have allowed the organisation to enter in the international market and to strengthen its position. The international business strategies, particularly acquisitions provided clear opportunities for SABIC to grow the market and to minimise the threats of competition and also to enhance the market share. Besides, the increased level of globalisation has also assisted the organisation to exploit the global market. SABIC has indeed attained various advantages in the international market which are required in the way of becoming a leader in petrochemical industry. In near future, it is possible that the organisation would make various investments in the foreign markets and strategically position itself in key regions particularly in the emerging economies. References Al-Otaibi, A. & et. al., 2006. SABIC Strategic Analysis. King Fahd University of Petroleum and Minerals, pp. 1-24. Alperowicz, N., 2010. SABIC Grows and Diversifies. Chemical Week Magazine. [Online] Available at: http://www.chemweek.com/sabic2010/ [Accessed December 06, 2013]. Credit Suisse, 2011. Increasing our Price Target to SAR 125, BUY on Any Weakness. Research Flash - Company Note. [Online] Available at: http://mec.biz/term/uploads/2010-09-03-2011.pdf [Accessed December 06, 2013]. Daniels, J. & et. al., 2012. International Business: Environments & Operations. Pearson Education. Eicher, T. & Kang, J. W., 2004. Trade, Foreign Direct Investment or Acquisition: Optimal Entry Modes for Multinationals. CESifo Working Paper, No. 1174, pp. 1-14. Griffin, R. W. & Pustay, M. W., 2007. International Business: A Managerial Perspective. Pearson/Prentice Hall. Grosse, R. & Behrman, J. N., 1992. Theory in International Business. Transnational Corporations, Vol. 1, No. 2, pp. 93-126. Herrmann, A., 2012. Globalization and its Effect on International Business. Global Awareness Society International 21st Annual Conference, pp. 1-11. Hill, C. W. L., 2010. International Business. McGraw-Hill Companies, Incorporated. Joshi, R. M., No Date. Globalization and International Business. International Business. [Online] Available at: http://www.rakeshmohanjoshi.com/images/files/globlizationandinternatinalbusiness.pdf [Accessed December 06, 2013]. Pearce, R., 2006. Globalisation and Development: An International Business Strategy Approach. Henley Business School, 1-41. Rugman, A. & Collinson, S., 2012. International Business, 6th Edition. Prentice Hall. Saudi Basic Industries Corporation, 2012. Annual Report & Accounts 2012. Corporate. [Online] Available at: http://www.sabic.com/corporate/en/images/SABIC_2012_Annual_Report_ENG_tcm12-5473.pdf [Accessed December 06, 2013]. Schumacher, R., 2012. Adam Smith’s Theory of Absolute Advantage and the Use of Doxography in the History of Economics. 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