Welcome to the

fascinating world of
International Business
Chapter No. 1
How you would define
international business?
 Defining International Business
International business is all business
transactions (private and governmental) that
involve two or more countries (Daniels and
Radenbaugh, 1995)

Hill defines international business as Any firm

that engages in international trade or
investment. (Hill, 2001)
International Business is a business whose
activities involve the crossing of national
borders. This definition includes not only
international trade and foreign manufacturing
but also encompasses the growing service
industry in areas such as transportation,
tourism, banking, advertising, construction,
retailing, wholesaling, and mass
communications. (Ball and McCulloch, Jr. 1989)
 Comprehensive Definition of
international Business
International business involves commercial activities that
cross national frontiers. It concerns the international
movement of goods, capital, services employees and
technology, importing and exporting cross border
transaction in intellectual property ( patents, trademarks,
know-how, copyright and materials etc) via licensing and
franchising, investments in physical and financial assets in
foreign countries, contract manufacture or assembly of
goods abroad for local sale or for export to other nations,
buying and selling in foreign countries , the establishment
of foreign warehousing and distribution systems, and the
import to one foreign country of goods from a second
foreign country for subsequent local sale.
Why study international
Business and Trade?
Why study international Business and
Trade?
Because the World is a global village
Economies are integrated with each other
International financial markets are increasing
behaving as a single market. The general
public is increasingly investing in shares issued
by companies with international affiliations.
Students may intend to follow a career
working for multination's in foreign countries
or in subsidiaries in their own country.
 What are Main
International Business
Activities?
Main International Business Activities
Scope of international business covers a wide
range of business transactions. Mainly three
forms of foreign involvement:

Export/Import of Goods and/or Services

International Contracting
Foreign Direct Investment
 1- Export/Import of Goods
Its the oldest form of international economic
activity.
International transactions in physical goods
may involve products from mining, petroleum,
agriculture and manufacturing activities.
Merchandise export/import have a very good
statistical coverage from international
economic organizations such as WTO, IMF and
OECD, World Bank
 Export/Import of Services
Export/Imports of services are extensive in the
construction, hotel, tourism, business
consulting, retailing and wholesaling sectors
etc.; Transactions in intangibles occur in fields
such as technology, trademarks, cross border
data transmission.
Why export/Imports of
Good and services are
important?
 Why export/Imports of Good and
services are important?
They make up a nations balance of trade
which is a major component of the nations
balance of payments
Export/Import represent an injection into the
circular flow of national income, serving to
raise real income and output.
 Do You know What is
international Contracting
and its Forms?
 2- International Contracting
International Contracting is operational form
usually involves a greater international
commitment of the companys resources than
does exporting or importing (Daniels and
Radebaugh, 1995)
It means that international contracting does
not need the involvement of ownership and
management of foreign property as foreign
direct investment does.
 Forms of international contracting
Licensing
Franchising
Turnkey Project
Subcontracting
 Licensing
Under a Licensing contract, a global
corporation (The Licensor) contracts to have a
foreign firm (The Licensee) produce and sell its
product in return for a licensing fee, according
to certain terms. The terms attempts to
assure quality control and protection of the
technology involved, Licensing is common in
the high-tech industries.
 Franchising
Under a Franchising deal, the initiating firm
(The Franchisor) sells the use of its name to
the foreign franchise (The Franchisee), who in
turn sells the products or services to
customers overseas. Franching is very
common for hotel chains or fast food
restaurants.
 Turnkey Projects
In a turnkey projects, the seller plans,
constructs, trains personnel and places in
operation a foreign facility, manages it for a
specified time period, and finally turn over the
keys to host-country firm or government.
Such venture are common in large electric
plant projects in less developed countries.
 Sub-Contracting
Sub-contracting occurs especially between
multinationals in developed countries and
their foreign subsidiaries, with components
being assembled in the cheaper- labour costs
country.
Sub-contracting is very common in the
automotive sector
 3- Foreign Investment
International business activities also include
an extensive range of operational methods
that involve different degrees of foreign
investment commitment.
Foreign investment takes two forms:
Direct Investment
Portfolio Investment
 Direct Investment
A direct investment is one which gives, most
of time, an investor a controlling interest in a
foreign company. Direct investment can take
the form of a
Joint Venture
Wholly Owned Direct Investment
 Joint Venture
A joint venture is a form of direct investment
in which the initiating firm shares ownership
with one or more partners. It can be the
result of political regulation in nations, where
the host Govt. demands the local participation
in ownership.
During the last few years joint ventures have
become a frequent form of strategic alliance
between firms.
 Wholly owned Direct Investment
Another form of foreign direct investment is
wholly owned direct investment, in which the
initiating firm establishes an affiliate overseas
and owns the entire venture.
The investment may take place through
establishment of a new business in the host
country, or it may involve purchase of an
existing business there.
 Portfolio Investment
Portfolio investments are undertaken for the
sake of obtaining investment income or capital
gains rather than entrepreneurial income.
In portfolio investment you divide your total
capital in small portions and invest these
portions in different projects for the purpose
of obtaining large profit with lower risk.
Whats the Difference between Direct
and Portfolio Investment?
The dividing line between direct and portfolio
investment is often difficult to determine.
However OECD recommends that investment
in up to 10% of the shares of the company be
classified as portfolio investment, while those
in excess of 10% of the company stock be
registered as foreign direct investment.
Who are International
contractors?
 International Contractors
International contractors are any firms that do
international business, ranging from exporters
and importers to franchisers, management
contractors, and foreign direct investors.
The term international contractors covers large
firms that have been called multinational
enterprises and small firms with fewer overseas
commitments that may be simple exporters or
contractors selling some services.
 What are Multinational
Enterprises and Transnational
Corporations?
 Multinational Enterprises
The multinational enterprises can be defined
as a firm with subsidiaries, branches or other
controlled affiliates in three or more
countries.
There is no single agreed-upon definition of
the multinational enterprises.
 Transnational Corporations
The term Transnational refers to a corporation
whose owners are in more than one nation.

For example, Royal Dutch Shell is a company

owned in the UK and Netherlands.
 So who would be the Multinational
Enterprises
A multinational Enterprise denotes a
headquarters or parent company that:
Engage in foreign production and other activities
through its own affiliates located in several
countries (three or more).
Exercise direct control over the policies of those
affiliates.
Strive to design and implement business strategies
in production, marketing, finance and other
functions that transcend national boundaries
 Reasons for the Existence of
Multinational Corporations
Comparative Advantage
Economies of Scale
Better access to international capital
Greater diversification
Better Technology
 Problems Created by MNCs in the
home country
Loss of domestic jobs
Sacrificing Technological Superiority
Shifting business to Low Tax Areas
Too Big To Fail
Dictate Policies in Home Countries
 Problems Created by MNCs in Host
Countries
Loss of Sovereignty
Domination of Economies
Technologically Dependent
Benefits flow to Home countries
 What is
Globalization and
what are its
indicators?
 Defining Globalization
Globalization refers to as closer economic
integration and interdependence through the
growth in international trade and investment.
Globalization is a process by which markets
and production in different countries are
becoming increasingly interdependent due to
the dynamics of trade in goods and services
and the flows of capital and technology.
 Globalization of the world economy is an
evolving process comprising in the main the:

Globalization of Production
Globalization of Markets
 Globalization of Production
The globalization of production refers to as
tendency among firms to source goods and
services from locations around the globe to take
advantage of national differences in the cost and
quality of factors of production.
By doing so companies hope to lower their
overall cost structure and/or improve the quality
or functionality of their product offering, thereby
allowing them to compete more effectively.
 Globalization of Markets
Globalization of markets refers to the merging
of historically distinct and separate national
markets into one huge global marketplace.

An important facilitator to the globalization of

markets has been represented by
technological innovation and transfer, through
foreign direct investment.
 Indicators of Globalization
The Increasing Trade/GDP Ratio
The increasing contribution of FDI flows to
economic activities

The growth of intra-industry Trade

The Declining concentration of international
business flows
Aggregate international business as a percentage
of GDP