International Business: Environments & Operations

CHAPTER 1

THE NATURE OF INTERNATIONAL BUSINESS

Aim

To introduce the nature of international business.

Objectives

After studying this chapter you should be able to:

• Understand the meaning of international business.

• Outline basic terms associated with international business.

• Describe reasons for the study of international business.

• Describe reasons why firms engage in international business.

• Explain the significance of international business.

• Outline criticisms of international firms.

1.1 Definitions

Finding a universally acceptable definition of international business is a little bit difficult, because there are many definitions of international business in the literatures coming from different perspectives of the writers, such as:

• International business is any firm that engages in international trade or investment (Robin 2002).

• The term international business simply implies that an organisation is operating in more than one country. In this sense, it is a generic term (Hill 2003).

• International business is a field of management training that deals with the special features of business activities that cross national boundaries (Robock and Simmonds 1989).

• International business is all business transactions that involve two or more countries (Thompson 2000).

• International business is all commercial transactions, including sales, investments and transportation that take place between two or more countries (Daniels 2009).

The lack of consensus concerning the domain of international business is due to differences in emphasis on either the firm or the exchange or transactions, as the focus of the subject matter or unit of analysis.

Toyne (1989) argued that the lack of consensus concerning the domain of international business is due to a misplaced emphasis on the firm as unit of analysis. For him, exchange is the essence of international business, and if exchange were made the unit of analysis, it would make it possible to define the field on a more acceptable basis.

It is in that light that international business is defined this book as: any commercial transactions engaged by a firm that includes trade in goods and services, and investment activities, that takes place across international borders.

This definition is considered more adequate and appropriate as it lies emphasises on both the firm and exchange/transactions delivering a more sensible, universally acceptable definition.

1.2 Basic Terms Associated With International Business

It is useful to begin by clarifying some of the terminologies used in the literature of international management. The terms international business, multinational business, global business and transnational business are often used interchangeably. This can be a cause of serious confusion, so it is important to define and distinguish between these terms.

The importance of this distinction lies in the fact that a spectrum of international business activity can be identified depending on the nature and extent of business’s involvement in international markets, the degree of co-ordination, and integration of geographically dispersed operations depending on the breath of international presence. Therefore, business and management issues facing an organisation will vary considerably depending on the breath of international presence.

Some of the terms associated with internal management include:

• International business.

• Multinational business.

• Multinational companies or corporations (MNCs).

• Global business.

• Transnational business.

International Business

The term international business simply implies that an organisation is operating in more than one country. In this sense, it is a generic term.

Multinational Business

A multinational business is one conducting international business and operating in several countries. In addition the term implies some decentralisation of strategy and management decision making to overseas subsidiaries, with little co-ordination of activities and subsidiaries across national boundaries. In other words, subsidiaries operating in different countries are allowed considerable autonomy in terms of their strategies, which are largely determined by local conditions.

Multinational Companies or Corporations -MNCs

Many books also use the term MNC’s in place of multinational business. MNCs have been defined in many ways by business scholars and researchers such as:

Firms having operations in more than one country, with international sales, and nationality mix of managers and owners (Thompson 2006).

An organisation that produces in, markets in, and obtains components of products from one or more countries for the purpose of increasing benefits to the overall enterprise (Abbass1995).

Global Business

A global business is one conducting its activities in a large range of countries across the world with a strategy that is highly co-ordinated and integrated throughout the world. Company strategy is determined centrally and subsidiaries have little autonomy in their operations. Global corporations sell similar goods in all areas.

Transnational Business

The term transnational business describes the situation when an organisation conducts its activities across national boundaries with varying degrees of co-ordination, integration and local differentiation of strategy and operations, depending on market and business conditions.

1.3 The Development of International Business

International business is not a new phenomenon. However the volume of international business has increased dramatically with time.

The history of international business could be traced back to the beginning of international trade – tracing back to the period before the coming of industrial revolution as many financial institutions have flourished during the 14th and 15th century in such cities as Venice, Barcelona and Geneva and even African sub regions.

As explained earlier, the emergence of a more open world economy, the globalisation of consumer tastes, and the unabated construction of global electronic highways, have all increased the interdependency and inter-connections of nations and economies across the globe, contributing to the development of international business.

With the rapidly changing world, the demand on countries to produce, expand, develop and advance has become overwhelming, and international competition for goods and services has gone beyond national boundaries.

The emergence of global economy and global marketplace has also transformed the world into a massive business community. As barriers between nations are being removed and markets continue to surge, firms are finding that they must develop international businesses activities and as such, the nature of doing business has gone international and even global. The emergence of different businesses of all sizes from different countries both developed and developing has become eminent, with enterprises of every size taking up benefits of international business.

1.4 International Business versus Domestic Business

International business differs from domestic business. The difference between them lies in the multi-dimensionality and complexity of foreign country locations where an international business may be operating.

The basic principles of management usually apply to any business, whether operating domestically or internationally. However, the application will differ when a firm moves from domestic to international business due to differences in the business environment.

Differences in international business environment could be traced to influences from locations or countries, which may differed in terms of politics, economics, legal, and behavioural conditions, natural and artificial resources existing in each country etc. It is a fact that different resources are found in different parts of the world and there are geographical barriers to these resources or factors of production.

The availability and distributions of resources as factors of production in different locations or countries of the world with regards to availability of input supplies, communications and distribution channels, climate conditions- the chance of adverse climate conditions and natural disaster, political risks etc, in one country or the others- is likely to affect the choice of international business locations, investment decisions and management.

Political disputes can result in military confrontation that disrupts trade and international business investment. For example, in 2000, terrorist bombing of hotel in Indonesia led to loss of tourist revenue and investment for that country.

Natural disasters can also create limitations to international business activities performance in a particular location. For example, droughts in New Zealand in 2000, forced farmers to reduce stocks of sheep which resulted to unexpected global shortages of lamb and wool that had negative impact on their prices.

Economic policies can differ between government and business locations which also explain why business investment capital and people prefer one country location to another, and business are located in particular locations.

Legal policies usually differ from country to country with differing effects on international business, depending on the country’s approach to business regulations. A nation’s legal policies can create different operational legal environment or condition for international business in relation to the domestic one.

The ways in which laws are enforced also affect a firm’s overseas operations. Domestic laws on such matters as taxation, employment and foreign exchange transactions can determine how the international businesses operating in a locality is taxed, how its revenues can be converted from local currency to foreign currency for repatriation, and even sometimes the employment procedures.

International law may also determine how companies can operate in certain places. Most countries have joint international treaties and enacted domestic laws dealing with the violation of trademarks, patented knowledge and copy righted materials. Many however do little to develop, enforce either treaties or their own laws.

It is therefore important, that international business managers should be up to date with the knowledge of the business environmental factors -physical, political, legal, economic and behavioural factors that can help them understand and better determine how to deal with differences. An international business manager needs the knowledge and awareness implications of the complex and differing business environments the firm operate, as well as effective management.

1.5 Why Firms Engage In International Business

There are a number of reasons why firms engage in international business. These reasons could be categorised under the following headings:

• Growth

Some firms engage in international business to open up markets for their firms to improve business performance. Such firms always want growth and if they have slow growth in their country they search for new markets outside the home country.

Firms operating in mature markets in developed countries experience a growth imperative to look for new opportunities in emerging markets, when expansion opportunities become limited at home. Such firms like McDonald’s are often driven to seek expansion through international markets. A mature product or service with restricted growth in its domestic market may have new life in another country where it will be at an early stage of the life cycle. In addition, new markets abroad provide a place to invest surplus profits as well as employ underutilized resources in management, technology and machinery.

• Obtain greater profits

There are firms that engage in international business to increase their chances of obtaining greater profit for their firms especially, when they are faced with serious competition at home, and there is an ever pressing need to go ahead of the competition. I usually when there is less competition abroad, these firms may be able to take advantage of the opportunity to service the foreign market better and as such make more profit abroad.

• Reduce cost of production and gain competitive advantage

A firm may also engage in international business to reduce the cost of production at home because, producing overseas in other countries may be less expensive, where it is possible to produce at lower cost as a result of low cost of input materials, such as low cost raw materials energy, and labour etc - especially in developing countries.

Firms gain competitive advantage by improving their resource base. They are also looking for anything that will give them competitive advantage. They seek out products, services, resources and components from foreign countries to gain competitive advantage. Sometimes it is because domestic suppliers are inadequate. Sometimes this means acquiring a resource that cuts costs. Sometimes, just the prospect of shifting production overseas improves competitiveness at home.

• Expanding sales

A firm may go international to expand sales of its products and services because logically, there are more potential consumers and sales in the world than any single country. Increased sales should be a reason for a firm to expand overseas into international markets.

• General product or customer demand overseas

The demand for a firm’s product overseas can also prompt a firm to engage in international business. A home based firm may be expanding rapidly, but not rapidly enough to keep up with market demand overseas.

Operations in foreign countries frequently start as a response to customer demands or as a solution to logistical problems. Certain foreign customers, for example, may demand that their supplying company operate in their local region so that they have better control over their supplies, forcing suppliers to comply or lose the business. McDonald’s is one company that asks its domestic suppliers to follow it to foreign ventures. Meat supplier OSI Industries does just that, with joint ventures in seventeen countries so that it can work with local companies making McDonald’s hamburgers.

• Protect domestic markets

A firm may decide to engage in international business to protect its domestic market by going abroad. By moving its facilities to a country where its competitor is located, the firm can enjoy the same advantage in terms of low cost of labour, raw materials, energy, and as such be able to compete favourably.

• Protect foreign markets

Some firm often go into international business for defensive reasons, such as to counter advantages gained by competitors in foreign markets that might hurt their activities in foreign markets or even.

• Globalisation of competitions

One of the most common reactive reasons that prompt many firms to go overseas is global competition. Global competition has led many firms who have before felt comfortable doing business domestically to react to threats from overseas businesses and look for more opportunities over eases. If they do not take the opportunities created by globalisation other competitors who already have overseas operations or investments may get so entrenched in foreign market that it becomes difficult for new forms to enter at a later time. In addition, the lower costs and markets power available to these competitors operating globally may also give them an advantage domestically.

• Regulations and restriction

Regulations and restrictions by a firm’s home government may become so expensive that a firm may seek out less restrictive foreign operating environment to survive and grow. Firms from different countries may decide to merge to avoid host or home country regulations. An example is the merger between U.S. pharmaceutical maker Smith line and Britain’s Beecham. The merger helped these firms involved become insiders in both Europe and America, and guaranteed that they would avoid licensing and regulatory hassles in these two large markets: Western Europe and United States.

• Minimising risks

Operating in countries with different business cycles can minimise swings in sales and profits. The key is the fact that sales decrease or grow more slowly in a country that is in recession and increases or grow more rapidly in one that is expanding economically. In addition by drawing or obtaining supplies of products and components from different countries, an international firm may be able to soften the impact of demand or price swings or resource shortages in one country.

1.6 The Study of International Business

The study of international business is now becoming very important because as explained earlier, international business activities affect all companies large or small, as most firms now sell output to, and secure supplies from, foreign countries or abroad and international business now makes up a large portion of world total business.

Globalisation, advances in transportation and telecommunications technology, all have now created a global village, bringing firms closer to their international environments, and making it almost impossible for them to avoid international competition against products and services that come from international business.

When a firm operates internationally, it will engage in modes of business that differ from those in which it engages domestically and obviously will need to understand these different modes.

The physical, economic, political, social and legal conditions that affect the ways in which a country conducts international business also differ from country to country, creating a more diverse and complex operating environments than those that conduct business only at home.

The study and understanding of the operations of international business becomes imperative for all firms engaged in international business regardless of sizes, and those interested in entering into international business activities. The study and understanding of international business management is likely to contribute to their management skills from an international standpoint, equipping them with the needed international skills perspective as regards to carrying out their business activities efficiently and effective, in terms of where to obtain the inputs of quality, at best price and where to sell the products and services at best price possible, etc.

Countries have different political, economic social-cultural and legal systems and these can vary dramatically.

A better understanding of international business and management will also help them make more informed strategic and operational decisions in a now global market. They need to make the right decisions on where in the world to site production activities to minimize costs and to maximize value added. They must also make ethical decide concerning their business behaviour internationally-whether it is ethical to adhere to environmental standards, and how best to co-ordinate and control globally dispersed production activities to ethical standards. The international business management skills can now be acquired by firms from many sources- Colleges, Universities, etc.

Further Reading

Geert, Hofstede. (1983),The Cultural Relativity of Organisational Practices and Theories, Journal of international Business Studies.

Ike, L. (2016), Management: Principles and Techniques, Xlibris Publication United Kingdom.

Ike, L. (2016), Risk Management & Captive Insurance, Xlibris Publication, United Kingdom.

John, D. Daniels, Lee Radebaugh, John Daniels (2009), International business 5th Edition Ma Addison Wesley.

John, D. Daniels, Lee Radebaugh (1989), International business 5th Edition Ma Addison Wesley.

Philips, J. (2014), Strategic Management Prencice Hall Europe.

Thompson, G. (2015), Strategic Management Oxford Press.

CHAPTER 2

GLOBALISATION AND INTERNATIONAL BUSINESS

Aim

To introduce globalisation and impact on international business.

Objectives

After studying this chapter you should be able to:

• Understand the meaning and of globalisation on international business.

• Describe the forces driving globalisation.

• Outline the various facets of globalisation.

• Describe country dimensions of globalisation.

• Explain the significance of international firms.

• Outline criticisms of globalisation.

2.1 Introduction

Globalization is one of the most used yet complex terms in international business.

Globalization has several facets which are reflected in the definitions available in literatures.

According to George Stonehouse, David Campbell, Jim Hamill,Tony Purdie (2005), The word globalisation is used to describe a range of related but distinct, sociological, economic and business phenomena.

• Globalisation of economies - increasing interdependence between national economies throughout the world.

• Globalisation of markets - increasing homogenization of consumer tastes and product preferences in certain markets, as evidenced by the popularity of global branch in certain markets.

• Globalisation of industries - the increasing globalisation of the productive process, with firms choosing to concentrate or disperse value adding activities around the world according to the location advantages to be obtained.

• Globalisation of strategy - the extent to an international business configures and co-ordinates its strategy globally.

Globalisation has also been described by many other writers (Thompson 2015, Philips 2014, and Jones 2016), as:

• The broadening set of interdependent relationship among people from different parts of the world that happens to be divided into nations.

• "Integration of world economies through the reduction of barriers to movement of trade, capital, technology and people.

• The increasing interdependence between national economies and markets.

• Increasing degree of cultural interaction and convergence between countries of the world from a sociological perspective.

• The tendency for transnational business to configure their business activities on a worldwide basis and to co-ordinate and integrate their strategies and operations across national boundaries.

• The development of global or worldwide business activities, competition and markets, and the increasing global inter-dependence of national economies.

Simply put, globalisation is about interdependency of the world economy and business activities. It refers to the shift towards a more integrated and interdependent world economy. This helps us understand the fact - which we are shifting away from a world, in which national economies were relatively self- contained entities; which is isolated from each other by barriers to cross-border trade and investment; by distance, time zones, and language; by national differences in government regulations, culture, and business systems. Instead,

The process of globalisation has led to a world in which barriers to cross border trade and investment is declining, perceived distance is shrinking due to advances in transportation and telecommunications technology, material culture is starting to look similar, the national economies are merging into an interdependent, integrated global economic system.

International business has increased as a result of this interdependent global economy. This increase has been facilitated by favourable political, economic, social and legal environment. For example, the symbols of material and popular culture are increasingly becoming global- from Coca-Cola to Sony Play stations, Nokia cell phones, Disney firms, IKEA stores, Apple iPods and phones, IBM, etc.

For consumers, globalisation has fastened international business and global opportunities and has made it possible for consumers to get more variety, better quality or lower prices of goods and services across nations. It has created the world where the volume of goods and services, and investment crossing national borders have expanded faster than world output consistently for more than half a century.

In today’s interdependent global economy, an American might drive to work in a car designed in Germany, that was assembled in Mexico by Ford from components made in the USA and Japan that were fabricated from Korean steel and Malaysian rubber. Fill the car with gasoline at a BP service station owned by a British multinational company. The gasoline could have been made from oil pumped out from a well off the coast of Africa by a French oil company that transported it to USA in a ship owned by a Greek shipping line. While driving to work, the American might phone to her stockbroker on a Nokia cell phone that was designed in Finland and assembled in Texas using chip sets produced in Taiwan that were designed by Indian engineers working for Texas Instruments, etc.

For firms, globalisation has produced many opportunities. It has made it possible for them to expand revenues by selling around the world and reduce their cost by producing in nations where key inputs are cheap.

Many products are made from different components or ingredients coming from different parts of the world. A good example is Kia Sorento - a Korean car. The Japanese firm Matsushita furnishes one of the car’s features- the CD player. The optical pick-up units of the car are made in China. The car maker sends the car to Thailand for mechanical structure and additional electronic components, and then transports the semi finished products to Mexico for final assembly, and trucks completed CD players to a USA port. Finally they are shipped to South Korea factory, where they are installed in the vehicles that Kia markets around the world.

Apart from some of these merits of globalisation highlighted above, globalisation it has also created new threats for businesses accustomed to dominating their domestic markets despite all opportunities created in international business. As globalization unfolds, it is transforming industries and creating anxiety among those who believed their job was protected from foreign competition.

Foreign companies have entered many foreign protected industries creating competition. For example, for many years U.S. automobile firms have been battling foreign competition with firms such as Japanese, Korea, and Chinese automobile firms. General Motors (GM) have seen its U.S. market share decline and many Japanese firms (e.g. Toyota) gaining reasonable market share and becoming the big automobile firms to reckon with in the global world.

2.2 The Forces Driving Globalisation

Although the origins of globalization can be traced back to the early history of international business, its rapid acceleration in the 19th and 20th centuries can be attributed to recent developments in a number of factors that facilitate increase in globalisation such as:

• Technological innovation.

• Trade liberalisation of cross borders.

• Improved international business support services.

• Growing consumer pressure.

• Increased global competition.

• Expanded cross national co-operations.

• Technological innovation

Innovation in technology has contributed to improved transportation and communication across the world.

Transportation technology such as railways, motor transport, stream shipping, Airoplanes have improved tremendously, allowing movement of people, materials and finished products from country to country, continent to continent, to move more quickly and cheaply, and contributing to increase availability as well as improve demand for products and services worldwide.

Improvements in communication and transportation technology have also permitted fast distribution of information and ability to learn about new and existing products and services developed in other parts of the world. Not only do improved communication and transportation speed up interaction, they also enhance a manager’s ability to compete in overseas markets and oversee foreign operations. Communication technology such as telephone, computers, internet, satellite television have all together contributed to both globalization of markets and the co -ordination of worldwide business activities.

The effects of increase in and expansion of technology can be felt in many areas of international business. Thanks to internet, even small companies can reach global customers and suppliers. For example, partners in Nigeria can easily contract via the internet with a factory in China to manufacture and export the sale of foreign manufactured goods to Nigeria. Improved communication and transport technology is now making it possible for businesses what used to be impractical to become practice. For example, foreign grown flowers from far away Ecuador and Israel can now be transported fast, and sold on time in any part of the world. This is what used to be unusual and impractical.

• Trade liberalisation across borders

Trade liberalisation across borders has also encouraged increase in the activities of international business.

In recent years many countries have encouraged liberalisation of their markets or economies and have taken necessary steps to reduced restrictions on international movements of products and services into their countries to take advantage of the benefits of international trade and business and foreign direct investments.

It could be recalled that during the 1920s and 30s, many of the world’s nation-states erected formidable barriers to international trade and foreign direct investment. Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods.

The typical aim of such tariffs was to protect domestic industries from foreign competition. One consequence is –Beggar thy neighbour retaliation in trade policies with countries progressively raising trade barriers and this depressed world trade.

Having learnt from this experience, many nations have come together to commit themselves to trade and to remove barriers to free flow of international trade, services and capital between nations.

The result of this commitment was the development and establishment of General Agreement on Trade and Tariff (GATT), and the resulting establishment of World Trade Organisation (WTO). The lowering of trade barriers has been found to contribute to the increase in globalization of markets, global rate trade and production.

• Improved international business support services

Companies and governments have developed a variety of support services that facilitate the conduct of international business activities.

Such support services are now taking the shape of variety of support services that include banks services, insurance services etc, that help to facilitate the sale of goods, business activities and foreign direct investment across borders.

For exempla, a bank credit arrangements and agreements, clearing arrangements that cover one country to another, insurance that covers such risks as damage en route and non payment.

Most producers can now be paid relatively for goods and services sold abroad. A foreign firm that sells goods across the border can now pay or collect payment in a bank in any part of the work.

Goods can also be insured to cover transactions in any part of the work- all making international business activities more possible. Such supporting services encompasses more than finance, and they are far too numerous for a comprehensive discussion.

Other services like the universal postal systems have now become eminent. There are many universal postal systems and agencies that are fastening the speed of international business, such as the Universal Postal Union - a specialised agency of the United Nations, which can help send letters and packages to any place in the world by paying postage only in the country from which you mail them and only in the local currency. A number of other reliable international postal firms can also be mentioned such as UPS, TNT, FedEx, etc

By improving airport and seaport facilities for example, many governments have fostered travel efficiencies that speed the process and reduce the cost of delivering goods internationally.

In addition, governments now provide an array of services to help domestic agencies sell more abroad, such as collecting information about foreign markets, furnishing contracts with potential buyers abroad, and offering insurance against non payment in the home currency.

• Growing consumer pressure

Due to improved communication technology, many consumers are now more knowledgeable of products/services.

Increased international business and resulting affluence has also made it possible for consumers to be able to afford varieties of products and services.

In fact, today’s consumers want more new goods or better goods i.e. consumer taste have changed. They now want greater variety of goods/services at lower price, as international business and resulting competition has spur domestic products to become more efficient. Also rising real term increase in consumer incomes contributes to an increase in demand for products and services worldwide.

Therefore, today’s consumers are now putting more pressure on firms to deliver more, newer, better products and services and they want them more timely differentiated.

The pressure from consumers has also spurred many firms to spend more heavily on research and development and to search for better international business approach of doing business in order to take advantage of business opportunities across borders, as well as deliver value to meet the pressing demands of global customers.

• Increase