International Business:

An Overview

Objectives
To define internal business (IB) and describe how it differs
from domestic business
To explain why companies engage in IB and why its growth
has accelerated
To introduce different modes a company can use to
accomplish its global objectives
To illustrate the role social science disciplines play in
understanding the environment of IB
To provide an overview of the primary patterns for companies
international expansion
To describe the major countervailing forces that affect IB

Chart1: Growth in the volume of world

merchandise trade and GDP, 2005-15
Annual % change

 2001 Prentice Hall

1-5

Introduction to International Business (IB)

IBall commercial transactions between two or more countries
Involves modes of business that differ from those at the
domestic level
Foreign conditions diversity companys external
environment

Why Companies Engage in IB

Expand salesgreater purchasing power in the world as a
whole
Acquire resourcesproducts, services, components
also, foreign capital, technologies, information
Diversify sources of sales and suppliestakes advantage of
business cycle differences among countries
Minimize competitive riskprevent competitor from gaining
advantages

International Business: Operations and Influences

OPERATIONS
EXTERNAL INFLUENCES
PHYSICAL AND
SOCIETAL FACTORS
Political policies and
legal practices
Cultural factors
Economic forces
Geographical influences

COMPETITIVE
ENVIRONMENT
Major advantage in price,
marketing, innovation, or
other factors
Number and comparative
capabilities of competitors
Competitive differences
by country

OBJECTIVES
Sales expansion
Resource acquisition
Diversification
Competitive risk
minimization
STRATEGY

MEANS
Modes
Importing and exporting
Tourism and transportation
Licensing and franchising
Turnkey operations
Management contracts
Direct and portfolio
investment

Functions

Marketin
g

Producti
on

Accounti
ng
Finance
Human

Overlaying
Alternatives
Choice of
countries
Organization
and control
mechanisms

Reasons for Growth of IB

Expansion of technologytransportation and communication
are quicker and less costly
Liberalization of cross-border movements
Government barriers reduced because:
desire for better access to greater variety of goods
and services
domestic producers forced to be more competitive
lowered trade barriers to their own exports
Development of supporting services by business and
governments to:
Ease the flow of goods and services sold abroad
Reduce risks of IB
Increase in global competitionfirms have become more global
to maintain competitiveness

Means of Carrying Out International Operations

OPERATIONS

EXTERNAL INFLUENCES

OBJECTIVES
PHYSICAL AND
SOCIETAL FACTORS

STRATEGY

MEANS

COMPETITIVE
ENVIRONMENT

Modes
Importing and exporting
Tourism and transportation
Licensing and franchising
Turnkey operations
Management contracts
Direct and portfolio
investment

Overlaying
Functions
Alternatives
Marketing Choice of
Production countries
Accounting Organization
Finance
and control
Human
mechanisms
resources

Modes of IB
Merchandise exports and importsmost common international
economic transaction, especially for smaller companies
Major source of international revenue and expenditures
for most companies
Service exports and importsnonproduct international earnings
Tourism and transportation
Performance of services for a fee
turnkey operations
management contracts
Use of assets by otherslicensing agreements
royalties
Franchisingfranchisor:
allows franchisee to use trademark
provides components, technology, services

Modes of IB (cont.)
Investmentsownership of foreign property in exchange for
financial return
Foreign direct investmentinvestor gains a controlling
interest in foreign company
joint venture
mixed venture
Portfolio investmentnoncontrolling interest

International Companiesterminology
Strategic alliancecollaborative arrangement of critical
importance to the competitive viability of one or more
partners
Multinational enterprise (MNE)company with global approach
to foreign markets and production
Globally integrated companyintegrates operations located in
different countries
Multidomestic companyforeign-country operations act fairly
independently

Physical and Societal Influences on International Business

EXTERNAL INFLUENCES
OPERATIONS
PHYSICAL AND
SOCIETAL FACTORS
Political policies and
legal practices
Cultural factors
Economic forces
Geographical influences

OBJECTIVES

STRATEGY
COMPETITIVE
ENVIRONMENT
MEANS

External Influences on IB
Physical and societal factorsmust understand
Politics that affect whether and how IB occurs
Domestic and international law determines what
managers can do in IB
Economics
Geographydetermine location and availability of worlds
resources
Competitive environment
Varies by industry, company, and country
strategies differ across companies
e.g., importance of controlling labor costs
e.g., influence of local and international competitors
size of market differs across countries

Competitive Environment and International Business

EXTERNAL INFLUENCES

PHYSICAL AND
SOCIETAL FACTORS
COMPETITIVE
ENVIRONMENT
Major advantage in price,
marketing, innovation, or
other factors
Number and comparative
capabilities of competitors
Competitive differences
by country

OPERATIONS

OBJECTIVES

STRATEGY

MEANS

Evolution of Strategy in International Process

Risk minimizationforeign operations viewed as risky
international commitments evolve gradually
Patterns of expansion
Passive to active pursuit of IB opportunities
initially wait for foreign opportunity
External to internal handling of IB
rely on intermediaries at first
Limited to extensive modes of operations
begin with importing or exporting operation
Few to many foreign locations
Similar to dissimilar business environments
Leapfrogging of expansionnew companies begin with
international focus
Possible because of founders experience and
technological advances that help define foreign markets

The Usual Pattern of Internationalism

Impetus for
international A
business

HIGH

Active search
for opportunities

MEDIUM
Passive
response to
proposals

Moderately
similar
E
Degree of
similarity
between
foreign and
domestic
countries

Internal versus
external handling of
foreign operations
B

Very
dissimilar

LOW
Domestic
Business

Quite
similar

One

Several
Many
D

Company handles
its own foreign
operations

Other firms
handle external
contracts

Limited
foreign
functions,
usually
export/
import

Limited foreign
production and
multiple functions

Mode of

operations
Extensive C
production
abroad with
FDI and all
functions

Number of foreign countries in

which a firm does business

Countervailing Forcescomplicate decision making

Global standardsexport suited to many countries
results in economies of scale
based on global strategy
Nationally responsive practicesadjust product or service to
unique local conditions
multidomestic approach advisable
Country versus company competitiveness
Companies compete by seeking maximum efficiency on a
global scale
Countries compete with each other to attain economic,
political, and social goals
no consensus on measures of goal attainment
Relationship unclear between country and company
performance
high-value activitiesproduce high profits or
performed by well-paid employees

Countervailing Forces (cont.)

Sovereigntyfreedom from external control
Countries will cede in order to:
gain reciprocal advantages
bilateral or multilateral commercial treaties or
agreements
attack problems that cannot be solved by a single
country
problem is too big or widespread
problem results from conditions that spill over
from another country
deal with areas of concern that lie outside the
territory of all countries (noncoastal areas of the
ocean, outer space, Antarctica)
technologically advanced countries believe that
companies should reap benefits from exploitation
other countries want to share the spoils