UNIVERSITY OF EMBU

SCHOOL OF BUSINESS AND ECONOMICS

DEPARTMENT OF BUSINESS STUDIES

BBA 309: Global Business Management

Lecturer: Susan Gachora Email: gachora.susan@embuni.ac.ke

LESSON ONE

INTRODUCTION TO GLOBAL BUSINESS MANAGEMENT

1.1 Introduction

International business has grown rapidly in current environment as Markets have become
global for majority of products and services and especially for financial tools.

The technical advancement also made possible companies to trade in different parts of the world.

In the global forex markets, billions of dollars are transacted each day, of which more than 90
percent represent financial transactions unrelated to trade or investment.

These business activities may be of government or private enterprises.

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The lesson covers:

 Lessons objectives
 Definition of international business
 Scope of international business
 Reasons for international business
 Characteristics of international business
 Benefits of international business
 Challenges of international business
 Learning activities
 Summary
 Further readings

1.2 Lesson Objectives

By the end of this lesson you should be able to:

 Define international business

 Explain the reasons for international business
 Discuss the characteristics of business
 Evaluate the benefits of international business
 Explain the challenges experienced in international business.


1.3 Definition of International Business

International business denotes the buying and selling of the goods and services around the
world.

International business is associated with all business movement that is performed beyond
national borders.

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International business is the activities done by individual or organization at global level in
order to accomplish the objective through export, import and foreign direct investment.

International business is defined as the commercial activities that cross national borders.

International business is defined as an organization that buys and/or sells goods and services
across two or more national boundaries, even if management is located in a single country.

It includes the global movement of goods, capital, services, employees and technology;
importing and exporting; cross border transactions in intellectual property such as:

 Patents
 Trademarks
 Know-how
 Copyright materials through licensing franchising and management contracts.

International business, whether in its conventional form of international trade and finance and
contemporary types of multinational business operations, it is operated at huge scale and has
great impact on political, economic and social field.

The fundamental objective of international business is to gain profit.

When firms do not get profit in domestic markets, they look for foreign market for lucrative
business.

1.4 Scope of International Business

International business has wide scope as it focuses on the particular issue and opportunities that
appear in business environment as organization operates at global scale.

International business is the generalized field of business, adapted to quite exceptional features in
global environment.

The characteristic feature of international business is that international organizations operate in

uncertain business atmosphere and subject to rapid change as compared to the domestic
environment.

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Numerous factors and environmental variables that are important in international business such
as foreign legal systems, foreign exchange markets, cultural differences, and different rates of
inflation are either largely irrelevant to domestic business or are so reduced in range and
complexity as to be of greatly diminished significance.

Domestic business is a limited case of international business.

The characteristic feature of international business is that international firms operate in

environments that are highly uncertain and where the rules of the game are often ambiguous,
contradictory, and subject to rapid change, as compared to the domestic firms.

1.5 Reasons for International Business

Though firms have to undergo numerous problems when expanding their business in other
countries, firms engage in international business for the following reasons:

i) Market expansion

Everyone wants to expand their market share and to sell more and more products. The
importance of International business lies in the fact that you get a new market to enter and to
expand in. No matter what was your position in the old market, the new market is a new playing
field for any company.

ii) Non-availability of product in new market

A major advantage the company can have is that the product it produces is not available in the
international market which the company is targeting.

The firm, therefore, has a “production advantage” which it can use to maximum benefit.

As a result, it is one of the benefits of the International business that the firm can establish a
monopoly or a duopoly in the target market, thereby generating a lot of revenue.

iii) Cost advantage

Many times, there is a cost advantage of exporting products to a different country. For example,
this cost advantage is apparent in the way China operates in today’s business environment.

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The benefits of International business are huge to Chinese companies because their cost of
production is very low.

One of the major contributors is their low Labor cost due to which Chinese equipment are able to
match any rates in the International market.

iv) Product Differentiation

If your products are differentiated and the differentiation is possible only in one’s own country,
then a company should definitely expand to International market products.

v) Economic recession in one’s own country

The Importance of International business is four-fold if a company is afraid of the recession in

their own country.

Some companies have presence across multiple countries and regions. This is so that they can
mitigate the effects of a slow economy in their home country.

Just like diversification of products is important, diversification of markets can also benefit the
company.

Hence, one reason International business is considered important is because of the safety it
provides to the company lest an economic downturn happens.

vi) Loss of Domestic market share

A company could be losing its domestic market share and it could find solace in a new
international market. This will revive the company in a big way and give fresh revenue to the
company which can help it fight in the local market as well. There are 2 main reasons that such
loss can happen in domestic market share.

a) Due to Competition increasing and market becoming saturated.

b) Due to the product of the company becoming obsolete in current market but being attractive in
a new market (developed vs underdeveloped economy)

vii) Growth in Demand in other markets

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As demand rises in new markets, the growth in demand automatically attracts new companies. If
your company is the one to reach there on time, it will automatically grow its market share –
which is what all companies want.

viii) Excess capacity of Production

One reason for large companies to look towards international business is to utilize the excess
production capacity of their manufacturing plants. Some companies have huge production
capacity. When you have such production potential, utilizing that potential is important.

As a result, many companies take the benefits of International business by utilizing their
manufacturing potential and starting the sale of their brand in International markets. This helps
the brand generate revenue and also push huge volumes out of their large factories.

ix) Economies of Scale

Naturally, when we are talking of operations and growth, one factor which helps the profitability
of the company to a great extent is Economies of scale. With your business growing and you
increasing your fixed costs, the concept of economies of scale sets in. Basically, the fixed cost
goes down when the manufacturing goes up from the same assets. This benefits the company
because the company gets a cost advantage over competitors. It also improves its own scale of
operations.

x) Purchasing power

One other reason for the importance of doing International business is the purchasing power
rising in target markets. Thus, if there is purchasing power of customers in a market, it makes
logical sense that the brands will target that market as well.

The best example of this is Dubai which as a country has grown exponentially in the last several
years and today is a huge tourist market.

The purchasing power in Dubai is great and you will find showrooms of all top brands present in
Dubai markets.

1.6 Characteristics of International Business

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Any business transaction between parties from more than one country is a part of international
business. The buying and selling of goods, product or services across the national boundaries of
a country are known as international business.

i) Large scale operations: 

In international business, all the operations are conducted on a very huge scale. Production and
marketing activities are conducted on a large scale. It first sells its goods in the local market.
Then the surplus goods are exported.

ii) Integration of economies: 

International business integrates (combines) the economies of many countries. This is because it
uses finance from one country, labor from another country, and infrastructure from another
country. It designs the product in one country, produces its parts in many different countries and
assembles the product in another country. It sells the product in many countries, i.e. In the
international market.

iii) Dominated by developed countries and MNCs: 

International business is dominated by developed countries and their multinational corporations

(MNCs). At present, MNCs from USA, Europe, and Japan dominate (fully control) foreign trade.
This is because they have large financial and other resources. They also have the best technology
and research and development (R & D). They have highly skilled employees and managers
because they give very high salaries and other benefits. Therefore, they produce good quality
goods and services at Low prices. This helps them to capture mid dominate the world market.

iv) Benefits to participating countries: 

International business gives benefits to all Participating countries. However, the developed (rich)
countries get the maximum benefits. The developing (poor) countries also get benefits. They get
rapid industrial development. They get rapid industrial development. They get more employment
opportunities. All this results in the economic development of the developing countries.
Therefore, developing countries open up their economies through liberal economic Policies.

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v) Keen competition: 

International business has to face keen (too much) competition in the world market. The
competition is between unequal partners i.e., developed and developing countries. In this keen
competition, developed countries and their MNCs are in a favorable position because they
produce superior quality goods and services, at very low prices. Developed countries also have
many contacts in the world market. So, developing countries find it very difficult to face
competition from developed countries.

vi) The special role of science and technology: 

International business gives a lot of importance to science and technology. Science and
Technology (S & T) help the business to have large-scale production. Developed countries use
high technologies. Therefore, they dominate global business. International business helps them to
transfer such top high-end technologies to the developing countries.

vii) Sensitive nature: 

The international business is very sensitive in nature. Any changes in the economic policies,
technology, political environment, etc. have a huge impact on it. Therefore, an international
business must conduct marketing research to find out and study these changes. They must adjust
their business activities and adapt accordingly to survive changes.

viii) If multinationals were not there the domestic companies would pay less.

ix) Increased investment opportunities: 

With globalization companies can move the capital to whatever country offers the most attractive
investment opportunity. This prevents capital from being trapped in domestic economies earning
poor returns.

x) Earn foreign exchange: 

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Countries export their goods and services all over the world. , This helps to earn valuable foreign
exchange. This foreign exchange is used to pay for imports. Foreign exchange helps to
strengthen the economy of its country.

xi) Optimum utilization of resources: 

International trade makes optimum utilization of resources. This is because it produces goods on
a very large scale for the international market. International trade utilizes resources from all over
the world.

1.7 Benefits of International Business

1. Survival

Because some of the countries are not as fortunate as the others in terms of market size,
resources, and opportunities, they must trade with others to survive.

Hong Kong, has historically underscored this point well, for without food and water from china
the British colony would not have survived along.

The countries of Europe have had similar experience, since most European nations are relatively
small in size.

Without foreign markets, European firms would not have sufficient economies of scale to allow
them to be competitive.

Nestle mentions in one of its advertisements that its own country, Switzerland, lacks natural
resources, forcing it to depend on trade and adopt the geocentric perspective.

International competition may not be matter of choice when survival is at stake.

However, only firms with previously substantial market share and international experience could
expand successfully.

2. Growth of Overseas Markets

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 Developing countries, in spite of economic and marketing problems, are excellent markets.
According to a report prepared by trade representative, Latin America and Asia/Pacific are
experiencing the strongest economic growth. Developed countries markets cannot ignore the vast
potential of international markets.

3. Sales and Profit

Foreign markets constitute a larger share of the total business of many firms that have wisely
cultivated markets aboard. Many large companies have done well because of their overseas.

4. Diversification

Demand for most products is affected by such cyclical factors as recession and such seasonal
factors as climate.

The unfortunate consequence of these variables is sales fluctuation, which can frequently be
substantial enough to cause layoffs of personnel.

One way to diversify a company’s risk is to consider foreign markets as a solution for variable
demand.

Such markets, even-out fluctuations by providing outlets for excess production capacity.

Cold weather, for instance may depress soft drink consumption. Yet not all countries enter the
winter season at the same time, and some countries are relatively warm year round.

5. Inflation and Price Moderation

The benefits of export are readily self-evident. Imports can also be highly beneficial to a country
because they constitute reserve capacity for the local economy.

Without imports, there is no incentive for domestic firms to moderate their prices.

The lack of imported product alternatives forces consumers to pay more, resulting in inflation
and excessive profits for local firms.

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 This development usually acts as prelude to workers demand for higher wages, further
exacerbating the problem of inflation.

Not only do trade restrictions depress price competition in the short run, but they also can
adversely affect demand for year to come.

6. Employment

Unrestricted trade improves the world‘s GNP and enhances employment generally for all
nations. Importing products and foreign ownership can provide benefits to a nation. According to
the institute for international Economics-a private, non- profit research institute – the growth of
foreign ownership has not resulted in a loss of jobs; and foreign firms have paid their workers the
same, as have domestic firms.

7. Standards of Living

Trade affords countries and their citizen‘s higher standards of living than other wise possible.
Without trade, product shortages force people to pay more for less, products taken for granted,
such as coffee and bananas may become unavailable overnight.

Life in most countries would be much more difficult were it not for the many strategic metals
that must be imported.

Trade also makes it easier for industries to specialize and gain access to raw materials, while at
the same time fostering competition and efficiency. A diffusion of innovations across national
boundaries is useful by-products of international trade. A lack of such trade would inhibit the
flow innovative ideas.

8. The international business brings countries together.

9. It creates an atmosphere of unity and makes the world as global village.
10. It exchanges the ideas, information, service, and capital across the country's borders.
11. This has positive outcomes in terms of best use of human capital that increases employee
opportunity.
12. There is equal growth of wealth
13. It contributes to new technology in the world.

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 14. Managerial skills
15. Infrastructure development
16. Creating jobs and bringing in investment capital from other countries by exporting
products and providing better services.
17. Price stability
18. Availability of goods and services to each and every one.
19. It also brings new environment of alliance, development, stability, affluence and
modernization.
20. Foreign markets create a larger share of the total business of many firms that have wisely
cultivated markets abroad.
21. The benefits of export are clearly acknowledged.
22. Imports can also be highly useful to a country because they constitute reserve capacity for
the local economy. Without imports, there is no incentive for domestic firms to moderate
their prices.

The lack of imported product alternatives forces consumers to pay more, resulting in inflation
and excessive profits for local firms.

This development usually acts as prelude to workforces demand for higher wages, further
exacerbating the problem of inflation.

The prospects of a business depend not only on its resources but also on the environment.

To adapt to the international business environment, the multinational corporations need to

engage in systematic collection of information on all environmental dimensions and the
economic agents in the local markets, processing this information to enhance environment
knowledge, identification of the more vulnerable internal areas and external opportunities
towards a better environmental fit; and implementation of the "best practices" more adjusted to
the identified environment.

A firms' ability to adapt to the environment is a resource, or a capability, whose foundations lie
in the human resources' stock of knowledge and experiences that seek a better fit to promote
better performance.

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It is also a crucial source of competitive advantage in a competitive game that does not attain a
neoclassical long-term equilibrium.

Global business demands that companies manage their worldwide operations efficiently and on
the basis of honesty, corporate integrity, following ethical standards and understanding the sense
of responsibility.

1.8 Challenges or Major Issues in International Business

Many investigators have found that when firms operate at international scale, they face numerous
challenges and issues.

What make international business strategy different from the domestic are the differences in the
marketing environment.

The important special problems in international marketing are given below:

1. Political and Legal Differences

The political and legal environment of foreign markets is different from that of the domestic. The
complexity generally increases as the number of countries in which a company does business
increases. It should also be noted that the political and legal environment is not the same in all
provinces of many home markets.

2. Cultural Differences

The cultural differences, is one of the most difficult problems in international marketing. Many
domestic markets, however, are also not free from cultural diversity.

3. Economic Differences

The economic environment may vary from country to country.

4. Differences in the Currency Unit

The currency unit varies from nation to nation. This may sometimes cause problems of currency
convertibility, besides the problems of exchange rate fluctuations. The monetary system and
regulations may also vary.

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 5. Differences in the Language

An international marketer often encounters problems arising out of the differences in the
language. Even when the same language is used in different countries, the same words of terms
may have different meanings. The language problem, however, is not something peculiar to the
international marketing.

6. Differences in the Marketing Infrastructure

The availability and nature of the marketing facilities available in different countries may vary
widely. For example, an advertising medium very effective in one market may not be available
or may be underdeveloped in another market.

7. Trade Restrictions

A trade restriction, particularly import controls, is a very important problem, which an

international marketer faces.

8. High Costs of Distance

When the markets are far removed by distance, the transport cost becomes high and the time
required for affecting the delivery tends to become longer. Distance tends to increase certain
other costs also.

9. Differences in Trade Practices

Trade practices and customs may differ between two countries.

Other challenges

10. Higher complexity of risk and uncertainty.

11. International businesses have to conform to the local rules and regulations in which they
operate.
12. Difficulty to gather information about foreign countries.

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 13. The risk factor is high in overseas business operations that include political, commercial,
and financial.
14. Communication and control of international business is complicated.
15. It is very difficult to understand the demand of the international market.
16. It is observed that Trade practices and customs may differ between two countries.
17. Some of the issues in international business environment include social, ethical,
environmental and legal issues.

1.9 Learning Activities

i) Discuss the reasons for international business

ii) Explain the characteristics of business
iii) Evaluate the benefits of international business
iv) Discuss the challenges experienced in international business.

1.10 Summary

The characteristic feature of international business is that international organizations

operate in uncertain business atmosphere and subject to rapid change as compared to
the domestic environment. Numerous factors and environmental variables that are
important in international business such as foreign legal systems, foreign exchange
markets, cultural differences, and different rates of inflation are either largely

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 irrelevant to domestic business or are so reduced in range and complexity as to be of
greatly diminished significance. Domestic business is a limited case of international
business. The characteristic feature of international business is that international
firms operate in environments that are highly uncertain and where the rules of the
game are often ambiguous, contradictory, and subject to rapid change, as compared
to the domestic firms.

1.11 Further Reading

1. Donald A. B., Wendell, H. McCulloch, Jr. (2014). International Business, 11th Ed. Illinois:
Irwin
2. Czinkota, M. R., Ronkainen, I. A., and Moffett, G. (2013). International Business, 7th
edition. New Delhi: The Dryden Press.
3. Ricky, W. G. and Michael, W. P. (2013). International Business: A Managerial Perspective,
3rd Ed., New York: Prentice Hall.
4. John, J. W., Kenneth, L. W. and Jerry, C.Y. H. (2011). International Business: An Integrated
Approach e-Business Updated Edition, New Delhi: Prentice Hall.
Journals
1. Journal of Business Administration and Education
2. Global Business Review

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