INTRODUCTION OF INTERNATIONAL BUSINESS

Introduction
Business is defined as a set of activities relating to

industry and commerce. When these activities are performed on an international level, these can be termed as international business. Basic functions, processes and techniques of international business are essentially the same as those involved in domestic business. What is different is the environment within which these functions are performed and processes are carried out,

While doing business within one's own country, one is familiar with most of the environmental factors and is readily able to cope with them. But the task of managing international business is not that easy. Because of operating in environments which are unfamiliar and different from the domestic environment, one needs to be extra careful and vigilant to these environmental differences. These variations may need adaptation for business success.

Definition
International Business means carrying business

activities beyond national boundaries. It normally includes the transactions of economic resources such as goods, capital, services(comprising technology, skilled labour, transportation, etc.) & international production. Production may include production of physical goods or provision of services like banking, finance, insurance etc..

DEFINITION OF INTERNATIONAL BUSINESS

In todays technology-connected global economy, even small businesses can compete in the international marketplace. According to business directory.com Definition 1 The economic system of exchanging good and services, conducted between individuals and businesses in multiple countries. Definition 2 The specific entities, such as multinational corporations (MNCs) and international business companies (IBCs), which engage in business between multiple countries

DEFINITION OF INTERNATIONAL BUSINESS

International Business is all business transactions that involve two or more countries. International Business comprises a large and growing portion of the worlds total business. International Business usually takes place within a more diverse external environment. International trade is a vital part of the economy Trade has contributed to world wide economic growth

Why Companies Engage in International Business

A) To Expand Sales: company's sales are dependent on two factors: the consumers interest in their product or services and the consumers ability and willingness to buy them. B) Acquire Resources: products, services, technology, and information C) Diversify Sources of Sales and Supplies D) Minimize Competitive Risk: companies move internationally for defensive reasons. Profits from one market can be used to expand operations in other markets

Reasons for Recent International Business Growth

Expansion of Technology: transportation, telecommunications; Transportation and telecommunications costs are more

conducive for international operations.

Liberalization of Cross-Border Movements: goods, services, labour, Capital Development of Supporting Institutional Arrangements:

development by business and governments of institutions that enable us to effectively apply that technology. Increase in Global Competition: new products become global; Globalization of production

Reasons for trade

Non availability of goods permanent non-availability Temporary non-availability product differentiation Differences in technology Principle of absolute advantage (A. Smith) Principle of comparative advantage (D. Ricardo) Differences in factor endowments Heckscher-Ohlin Theorem Differences in consumer demand Transport costs Economies of scale in production Government policies

Trade policies
Trade policies aimed to protect domestic producers do usually reduce

social welfare Tariffs, import quotas, tariff rate quotas, variable levies, state trading At a specific point in time, the effects of import quota and tariffs are similar Given the dynamic of price changes, tariffs are preferable to other import restrictions since world price changes are transmitted to the domestic market Export subsidies Export subsidies do not only reduce domestic welfare, they are also costly for the national Budget Foreign exporters suffer, while foreign importer benefit from export subsidies Price discrimination they realize an additional rent by charging different price for different countries Technical barriers to trade

POSSIBLE INTERNATIONAL BUSINESS ACTIVITIES

International trading (an international company can be used

as intermediary to re-invoice exports and imports) International services companies (re-invoice services through an international company) International construction and / engineering companies International transport/distribution companies Royalty companies Real estate companies Shipping and ship management companies Commission agents E-business international business is in the Banking, Commerce & Finance and International Trade & Relations subjects

MODES OF INVESTMENT
Foreign Direct Investment: gives the investor a controlling Interest in a

foreign company. It gives access to: - foreign markets - foreign resources - higher profits than exporting - partial ownership

Portfolio Investment: stock in a company or loans to a company or country in

the form of bonds, bills, or notes that the investor purchases.

Other Operational Definitions - Strategic Alliances

-MNCs, MNEs, TNCs, Global Company, Multi-domestic Company External Influences on International Business

Understanding a Companys Physical and Societal Environment Managers need a working knowledge of business operations, a working Knowledge of political sciences, law, anthropology, sociology, economics, and geography.

MEANING OF DOMESTIC TRADE

Trading that is aimed at a single market, the firms domestic trade, is referred to as domestic trading. In domestic trading, the firm faces only one set of competitive, economic, and market issue and essentially must deal with only one set of customers, although the company may have several segments in this one market.

Difference between domestic and international trade

Difference between domestic trade and foreign trade and their peculiar problems Trade, no doubt, implies exchange of goods between persons, but there are marked differences between domestic trade and international trade. The differences and the complications arise therein are as follows: Distance The distance involved in export of goods in external trade is generally greater than on the domestic trade.
Language differences

There are differences in the languages of the nations of the world. The overseas traders should be very careful in preparing the publicity material in the languages of the trading country A producer should have full knowledge about the market of his products. For exporting goods particularly a thorough research is undertaken.

Cultural difference

Differences between domestic and international trade

Documentations In the home trade there are few documents involved in the exchange of goods. Payments In the internal trade, the goods are exchanged in the currency unit of the country. In case of foreign trade currencies differ widely throughout the world and those also vary in value. Transport and insurance cost The transport and insurance costs are less in case of domestic trade. For the exports, on the other hand the cost of transport is high and the insurance is complicated.

Technical difference In the national market the difference in the technical specification for goods and their requirements is not wide. Tariff barriers In the national trade, there are no custom duties, exchange restrictions, fixed quotas or other tariff barriers.

International Business activities that require the movement of resources, goods, services, and skills across national boundaries all business transactions that involve two or more countries International Trade the export or import of goods or services to

consumers in another country

International Investment investment of resources in business activities outside a firms home country International Management the performance of the management functions

 Why Globalize?
expand sales

International Strategy Formulation

when domestic markets are saturated, should go overseas to increase sales and profits

acquire resources
resources may be more readily available and less costly in other countries

diversify sources of sales and supplies

different business cycles between countries may avoid impact of price swings or shortages

avoid tariffs

 In the past, managers have viewed the global sector as closed

Each country or market was assumed to be isolated from others Firms did not consider global competition, exports

The Changing Global Environment

Todays environment is very different

Managers need to view it as an open market Organizations buy and sell around the world Managers need to learn to compete globally

The Changing Global Environment

Global organizations
organizations that operate and compete in more than one country are free to establish foreign subsidiaries to become strong world competitors

Home Country
country in which the parent organization is based

Host Country
country in which the parent organization makes the investment

Barriers to Free Trade

Tariffs Export Restraints Distance Quotas

Buy National Campaigns

Free Trade Barriers

Economic Communities

Cultural Differences

Local Ownership Requirements

Barriers to International Trade

Trade Controls - governmental influences usually aimed at reducing the competitiveness of imported products or services
Tariffs: taxes levied on goods shipped internationally Subsidies: direct payments to domestic producers Quotas: legal restrictions on the import of goods

Free trade doctrine - predicts that if each country agrees to specialize in the production of goods that it can produce most efficiently, it will
make the best use of global resources result in lower prices

Distance and Cultural Barriers

Distance and Cultural barriers also closed the global environment
Distance closed the markets as far as some managers were concerned Communications could be difficult Languages and cultures were different

During the last 50 years, communications and transportation technology has dramatically improved
Jet aircraft, fiber optics, satellites have provided fast, secure communications and transportation These have also reduced cultural differences

 Declining barriers have opened great opportunities for managers.

Managers can not only sell goods and services but also buy resources and components globally.

Effects of Free Trade on Managers

Managers now face a more dynamic and exciting job due to global competition.

Economic Integration
Free Trade Area: all barriers to trade among member countries are removed, so that goods and services are freely traded among the member countries NAFTA (North American Free Trade Agreement)

Customs Union: barriers to trade among members are dismantled while a common trade policy with respect to nonmembers is established Common Market: no barriers to trade exists between members and a common external trade policy is in force; also, factors of production, such as labor, capital, and technology move freely between member countries European Union (EU) SAARC ASEAN

Global Task Environment

Suppliers

Competitors

Forces Yielding Opportunities and Threats

Distribu tors

Customers

Suppliers & Distributors

Managers buy products from global suppliers or make items abroad and supply themselves
Key is to keep quality high and costs low

Global outsourcing: firms buy inputs from throughout the world

GM might build engines in Mexico, transmissions in Korea, and seats in the U.S. Finished goods become global products

Distributors: each country often has a unique system of distribution

Managers must identify all the issues

Customers & Competitors

Formerly distinct national markets are merging into a huge global market
True for both consumer and business goods Creates large opportunities

Still, managers often must customize products to fit the culture

McDonald's sells a local soft drink in Brazil

Global competitors present new threats

Increases competition abroad as well as at

Forces in the Global General Environment Figure 4.3

Political & Legal Systems

Sociocultural System

Forces yielding Opportunities and threats

Economic system

Political/Legal Environment
Different legal systems: common law or civil law
Representative democracies: such as the U.S., Britain, and Canada Citizens elect leaders who make decision for electorate. Usually has a number of safeguards such as freedom of expression, a fair court system, regular elections, and limited terms for officials Well-defined legal system and economic freedom Totalitarian regimes: a single political party or person monopolize power in a country Typically do not recognize or permit opposition Do not have most safeguards found in a democracy Difficult to do business with given the lack of economic freedom Human rights issues also cause managers to avoid dealing with these countries

Economic Environment
Economic Systems Market Economy
production and prices are dictated by supply and demand production of goods and services is privately owned competitive markets strong currencies institutional support well-functioning infrastructures investment opportunities for individuals social welfare, consumer-directed, administratively guided

Economic Environment
Command Economy
government sets goals and determines the price and quantity of what is produced most command economies are moving away from the command economic system

Mixed Economy
certain economic sectors controlled by private business, while others are government controlled many mixed countries are moving toward a free enterprise system

Key Economic Issues (and indicators)

economic growth, inflation, quality of life, GDP exchange rates

Recent Trends
Current shift away from totalitarian dictators toward democratic regimes
very dramatic example seen in the collapse of the former Soviet Republic also very pronounced in Latin America and Africa

With this shift, has come a strong movement toward free market systems
this provides great opportunities to business managers on a global level many businesses are investing millions in former totalitarian countries to seize these opportunities

Sociocultural Forces
National culture: includes the values, norms, knowledge, beliefs, and other practices that unite a country. Values: abstract ideas about what a society believes to be good, desirable and beautiful.
Provides attitudes for democracy, truth, appropriate roles for men, and women. Usually not static but very slow to change.

Norms: social rules prescribing behavior in a given situation.

Folkways: routine social conventions including dress codes and manners. Mores: norms that are central to functioning of society - much more significant than folkways.

examples of mores include theft, adultery, and are often enacted into law

International Strategy Formulation

How Do Organizations Globalize? Stage One: Passive Response Importing: firm makes products and sells abroad Exporting: to foreign countries Stage Two: Initial (Overt) Entry Hiring foreign representation Contracting with foreign manufacturers Stage Three: Fully-established operations Licensing/Franchising Foreign Direct Investment (FDI) - Joint Ventures - Foreign Subsidiary

International Strategy Formulation

Exporting: selling abroad, either directly to target customers or indirectly by retaining foreign sales agents and distributors Importing: selling other countries products in the home country, either directly to target customers or indirectly
Adv: quick and relatively inexpensive test the waters and learn about customers Disadv: high transportation costs tariffs and quotas danger of poor intermediary selection

International Strategy Formulation

Licensing: an arrangement where a firm (licensor) grants a foreign firm the right to use intangible (intellectual) property such as patents, copyrights, manufacturing processes, or trade names for a specified period of time, usually in return for a percentage of the earnings, called royalty Adv: small or insignificant investment Disadv: loss of control

International Strategy Formulation

Franchising: an arrangement where a parent company (franchisor) grants a foreign firm (franchisee) the right to do business in a prescribed manner. Usually involves a longer time commitment by both parties than required under licensing agreements Adv: small or insignificant investment Disadv: loss of quality control

International Strategy Formulation

Foreign Direct Investment: operations in one country that are controlled by entities in a foreign countries
acquiring control by owning more than 50 percent of the operation turns a firm into a multinational enterprise

Foreign Direct Investment

Strategic Alliance:
a cooperative agreement between potential or actual competitors an agreement between firms that is of strategic importance to one or both firms; competitive viability

Joint Venture:
the participation of two or more companies jointly in an enterprise in which each party contributes assets, owns the entity to some degree, and shares risk

Wholly Owned Foreign Subsidiaries

provide for tightest controls by foreign firms very costly but can yield high returns

International Expansion
Figure 4.6

Importing Exporting

Licensing Franchising

WhollyJoint Ventures owned For. Strat. Alliances Subsidiary

Low

Level of Foreign involvement and investment needed by a global organization

High

The Global Manager

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International Managerial Attitudes

Ethnocentric: the belief that the home (originating) countrys management style is superior to the host (recipient) countrys management style
companies with this type of management may do business in foreign countries but their subsidiaries will be managed by home country personnel with home management style

Geocentric: (sometimes called regiocentric management) tends to see the whole world as a single marketplace and as such employ a mix of management styles of the home country and host country
managers and other key personnel are selected based on merit without regard to their country of origin

Polycentric: the philosophy that the host countrys management style is superior to the home countrys style
will employ host country managers to run each subsidiary