AE5 - INTERNATIONAL

BUSINESS AND TRADE

College of Business and
Entrepreneurial Technology
 PRAYER
Lord, true source of light and wisdom, give me
keen sense of understanding, a retentive memory
and a capacity to grasp things correctly.
Grant me the grace to be accurate in my
expositions and the skill to express myself with
thoroughness and clarity.
Be with me at the start of my work, guide its
progress and bring it to completion. Amen
Fr. MJC Ladra
 International Business and Trade

At the end of the topic, the students should be able to:

● Classify international business activities
● Describe various exporting operations
 International Business
Operations
International trade refers to the exchange of goods and
services across national borders through exporting and
importing (Cavusgil, et al. 2015)

Merchandise trades - the tangible products that are

bought and sold while service trades are services (such
as air travel or financial services) that are bought and sold
(Peng 2013)
International Business
Operations
International Business
 Operations
CROSS-BORDER MOVEMENT OF MERCHANDISE

● Global market share is the measure by which one can

assess the presence of a firm in a worldwide industry.
Market share is defined as "the percentage of a market (in
terms of either units or revenue) accounted for by a specific

entity" (statista.com)
 International Business Operations:
EXPORTING

Market share = total number of sales

total sales for the industry

For example, assume that XYZ Electronics sold $5 million in

televisions in theU.S., in a total market in which $100 million in
televisions were sold during the same period.
How much is the market share for XYZ Electronics?

International Business
Operations
IMPORTING

Import (or global sourcing):

● to buy from abroad (Peng
2013)
 ● the procurement of products
or services from suppliers
located abroad for
consumption in the home
country or a third country
(Cavusgil, et al. 2015)

International Business
Operations
INTERNATIONAL ACTIVITY
EXPORTING
https://legacy.export.gov/How-to-Export

● to sell abroad (Peng 2013)

● the sale of products or services
to customers located abroad
from a base in the home SALES = REVENUES
country or a third country to cover costs and
(Cavusgil, et al. 2015) generate profits

ADVANTAGES OF EXPORTING
1. The cost of establishing and maintaining elaborate manufacturing
operations in one or several countries is shifted to investors who
are more comfortable doing business from a large fixed asset
base.
2. It can help companies achieve experience curves and location
economies.
3. by buying goods in one location and exporting them to another,
may realize significant economies of scale as the result of global
sales volume.
4. It is also easier to switch to another industry when existing
product lines achieve maturity
 DISADVANTAGES OF EXPORTING
2 Major disadvantages to concentrating on commodity trading
1. Exporting from a firm’s home operations can become
inefficient if there are lower cost locations for manufacturing
the product elsewhere.
2. High transport costs and national and regional trade
restrictions can make it uneconomical.
● Japan produces cars in the U.S. – no transport costs and no
import tariffs
 International Business Operations:
EXPORTING
1. Export Trading Companies (ETC)
● very large companies that are basically international traders
and whose principal sources of income are derived from
import-export activities
2. Direct Exporting to End Users
● involves developing an end-user customer base through
mailing lists and local telephone directories.
● bypasses the local trade channels and permits more flexible
price and payment arrangements between buyers and sellers. ●
Inexpensive and OTC goods seen on advertisements and
require cashless payments
 International Business Operations:
EXPORTING 3. Exporting through Foreign Import
Distributors
Advantages: Service and financial
● A well-developed distributor-dealer organization provides ongoing
after-sales service to customers esp. for highly technical products. ●
Financial advantage comes from a direct purchase from a manufacturer
from a published price list or sales agreement, setting up an accounts
receivable for the seller and an accounts payable for themselves.
● Disadvantage to selling to overseas distributors is if they are totally
independent of control by the manufacturer-exporter.
○ Buying directly from the exporter means having a title to the
item which allows them to apply any markup or markdown and to
 sell in any territory. (outside the specific zone of operation)

International Business Operations:

EXPORTING 4. Exporting through Foreign Import Agents
● Import agent does not purchase goods from a principal
(exporter), but accepts goods on consignment. This means
that no sale is made from export seller to import agent.
● Import agencies are normally established in free trade
zones and other similar duty-free or in-bond warehousing
areas
 ● Exporter has total control over merchandise

International Business Operations:

EXPORTING
5. Contract Manufacturing or contract-filling operations ● For small
companies enter into contract manufacturing arrangements may be
due to limited technology and may have legally registerable or
patentable intellectual assets in the form of patents, trade names,
trademarks or copyrights.

● For large companies as a means of limiting their wholly owned

 production units to the manufacture of what they consider to be
their core product lines.

● Examples: cosmetic companies, manufacturer of parts of Boeing

airplanes, bottling companies

International Business Operations:

EXPORTING
6. Turnkey Systems
● A turnkey project is an arrangement whereby a firm that specializes in
the design, constructions and start-up of a production facility
contracts with a foreign client and once the firm is completed, it is
 turned over to the client for full operation.
● Example: Chemical, pharmaceutical, petroleum and metal-refining
industries.
Advantages:
● A way of earning formidable returns on the asset of technological know-how
without making a long-term investment.
● May not be subject to any possible loss if the government or economy undergoes
adverse changes.
○ (local) government-owned public housing projects where a private
developer undertakes all activities including land purchases, permits,
plans, and construction, and sells the project to the housing authority.

International Business Operations:

EXPORTING
7. Licensing
 ● International licensing is an arrangement whereby foreign
licensee buys the rights to manufacture another firm’s
product in its country for a negotiated fee. Usually royalty
payment based on units sold.
Advantages:
● a firm does not have to bear the development costs and risks
associated with opening up of a foreign market
● when firm is unwilling to commit substantial financial resources
to an unfamiliar or politically volatile foreign market

International Business Operations:

EXPORTING
7. Licensing
Disadvantages:
● firm has no control over manufacturing, marketing and strategy required
to realize experience curve and location economies- typically licensee
sets up its own manufacturing operations.
● To compete in a global market, there is no way to coordinate strategic
moves across countries by using profits earned to support competitive
attacks in another.
● Potential loss of control of technological know-how to foreign companies.
○ RCA Corporation – licensed its color television technology to a number of
Japanese firms that quickly assimilated the
technology and used it to enter the U.S. Market. RCA Radio
Corporation of America, founded in 1919.
 International Business Operations:
EXPORTING
8. Franchising
● It is employed mostly by service firms, such as McDonald’s
and Hilton International.
● A franchising agreement involves a franchisor selling limited
rights for the use of its brand name to a franchisee in return
for a lump sum payment and a share of the franchise’s
profits.
● The franchise agrees to abide by strict rules as how it
conducts business-identical to all other locations
worldwide.
 International Business Operations:
EXPORTING
8. Franchising
● Advantages are similar to those of licensing-relieved of the
costs and risks of opening up a foreign market. – can build
up global presence quickly and at a low cost.

● Disadvantages: not as apparent as in licensing – lesser for

coordination in manufacturing
● Quality control and consistency are addressed by
 management subsidiaries (responsible to establish and
manage the franchise) in each country or region.

International Business Operations:

EXPORTING
9. Strategic Alliances
● Intercorporate agreement between two or more companies
designed to achieve various degrees of vertical and
horizontal integration.
● No formal mergers or acquisitions are involved.
● A temporary marriage of key human and other resources to
achieve certain advantages. Once objectives are reached,
 the alliance normally ends.

International Business Operations:

EXPORTING
10. Foreign Direct Investment (FDI)
● Made by companies into foreign markets for the purpose of
owning or co-owning, controlling and managing a business
enterprise with market share and earnings objectives in
order to achieve vertical and horizontal integration
● Horizontal integration is when a business grows by acquiring a similar
company in their industry at the same point of the supply chain. Vertical
 integration is when a business expands by acquiring another company
that operates before or after them in the supply chain.

International Business Operations:

EXPORTING
10. Foreign Direct Investment (FDI)
2 Major categories of FDIs
● Joint ventures and wholly owned subsidiaries

JOINT VENTURE ENTERPRISES

 ● Formed as corporations whose equity is divided among
joint venture partners-formally structured strategic
alliances. Corporate partners share decision-making
processes and distribution of earnings.

International Business Operations:

EXPORTING
JOINT VENTURES
2 Advantages
● A firm is able to benefit from local partner’s knowledge
of the host country operating environment
 ○ U.S. firms providing technology and know-how and
some capital
○ Local partner supplies the marketing expertise,
knowledge and business connections.
● Sharing the cost and risk when entering a new market ○
Political considerations - America to Japan through a
Japanese partner

International Business Operations:

EXPORTING
JOINT VENTURES
Disadvantages
 ● Similar to licensing - risks losing control of its
technology to a partner.
● Does not give a firm the tight and complete control over
operations that a subsidiary does
○ Completion of experience curves, location
economies and economies of scale may take longer ○
Does not give any specific partner the control to
engage in coordinated global attacks against rivals

International Business Operations:

EXPORTING
WHOLLY OWNED SUBSIDIARIES
● A corporation whose equity is almost or entirely wholly
owned by another corporation.
○ “Parent” is the investing company, subsidiary is
called “sub” which allows the parent more control
over operations as regulated by local laws.
● May be established in 2 ways:
○ set up a completely new operation in a country or
○ acquire a established firm and use that firm or
expansion
 International Business Operations:
EXPORTING
WHOLLY OWNED SUBSIDIARIES
● Reduces the risk of losing control over technological
competence
○ However, most host countries mandate joint
ventures
● Offers maximum global control over operations.
○ Geocentric parent in developing and implementing
strategies governing all aspects of its business
● Disadvantage: the most costly approach for achieving
international presence
 International Business Operations:
EXPORTING
11. Foreign Portfolio Investment

● Is an investment in foreign-based securities (stocks and bonds). ●

The objective is to generate income through interest, dividends, and
capital gains.
● The larger portion of international investment flows in the world
today are FPIs
● is a common way to invest in overseas economies. It includes
securities and financial assets held by investors in another country. ○
Example: US investors buy Indonesian government
bonds or shares on the Indonesia Stock Exchange