MGT 304- INTERNATIONAL BUSINESS AND TRADE
MODULE 1
Globalization- is driven by various new
development and gradual changes in the world
economy. Generally, organizations go global for
expanding their markets and increasing their sales
and profits. One of the major forces of globalization
is the expansion of communication systems.
FORCES OF GLOBALIZATION
• Advancement of Technologies
• Reduction in Cross-Trade Barriers
• Increase in Consumer Demand
• High Competition
Advancement of Technologies
Refers to one of the crucial factors of
globalization. Since 1990s, enhancement in
telecommunications and Information Technology
(IT) has marked remarkable improvements in access
of information and increase in economic activities.
This advancement in technologies has led to the
growth of various sectors of economies throughout
the world.
Apart from this, the advancement in
technology and improved communication network
has facilitated the exchange of goods and services,
resources, and ideas, irrespective of geographical
location. In this way, advanced technologies have led
to economic globalization.
Reduction in Cross-trade Barriers
Every country restricts the movement of goods and
services across its border. It imposes tariffs and
quotas on the goods and services imported in its
country. In addition, the random changes in the
regulations create a chaos in global business
environment. Such practices impose limits on
international business activities. However, gradual
relief in the cross-border trade restrictions by most
governments induces free trade, which, in turn,
increases the growth rate of an economy.
Increase in Consumer Demand
Acts as a main driver to facilitate globalization. Over
the years, with increase in the level of income and
standard of living, the demand of consumers for
various products has also increased. Apart from this,
nowadays, consumers are well aware about products
and services available in other countries, which
impel many organizations to work in association
with foreign players for catering to the needs of the
domestic market.
High Competition
Constitutes an important driver for bringing about
globalization. An organization generally strives hard
to grain competitive edge in the market. The frequent
increase in competition in the domestic market
compels organizations to go global. Thus, various
organizations enter other countries (for selling goods
and services) to expand their market share.
They export goods in foreign markets where the price
of goods and services are relatively high. Many
organizations have achieved larger global market
shares through mergers and acquisitions, strategic
alliances, and joint ventures. So, these are the major
factors that have contributed a lot in globalization
and the growth of global economy.
INTERNATIONAL BUSINESS
International business refers to the trade of goods,
services, technology, capital and/or knowledge
across national borders and at a global scale.
It involves cross-border transactions of goods and
services between two or more countries.
Transactions of economic resources include capital,
skills, and people for the purpose of the international
production of physical goods and services such as
finance, banking, insurance, and construction.
MODES OF ENTRY
• Exporting
• Licensing
• Franchising
• Join Venture
• FDI
• Merger and Acquisition
• Strategic Alliance
• Contract Manufacturing
Exporting
It is the process of selling goods and services
produced in one country to other country. Exporting
may be direct or indirect.
Direct export- a company capitalizing on
economies of scale in production concentrated in the
home country, establishes a proper system for
organizing export functions and procuring foreign
sales.
Indirect export- involves exporting through
domestically based export intermediaries. The
exporter has no control over his product in the
foreign market.
Advantages:
• It helps in distribution of surplus
• It is less risky
• Under direct export the exporter has no
control over selection of market
• It helps in fast market access
Disadvantages:
• High start-up cost in case of direct exports
• In indirect export, the exporter has no control
over distribution of products
• Exporting through export intermediaries
increase the cost of product
Licensing
Is a method in which a firm gives permission to a
person to use its legally protected product or
technology and to do business in a particular manner,
for an agreed period of time and within an agreed
territory. It is a very easy method to enter foreign
market as less control and communication is
involved.
Example: Starbucks (licensor) and Nestle (licensee)
for exclusive rights to sell Starbuck’s product.
Advantages:
• Less investment is involved
• Low cost of labor
Disadvantages:
• This method is time consuming
• Decline in product quality may harm the
reputation of licensor
Franchising
It is a system in which semi-independent business
owners (franchisees) pay fees and royalty to a parent
company (franchiser) in return for the right to be
identified by its trademark, to sell its product or
services, and often to use its business format or
system.
Example: Burger King, McDonald, etc.
Advantages:
• It is less risky
• Advantage of expertise of franchiser
• Highly motivated employees
Disadvantages:
• Difficulty in keeping trade secrets
• Franchise may become a future competitor
• A wrong franchisee may ruin company’s
name and goodwill
Join Venture
It is a strategy used by companies to enter a foreign
market by joining hands and sharing ownership and
management with another company. It is used when
two or more companies want to achieve some
common objectives and expand international
operations.
Example: Uber (a taxi company) and Volvo (heavy
vehicle co.)
The common objectives are:
• Foreign market entry
• Risk/reward sharing
• Technology sharing
• Joint product development
• It is useful to meet shortage of financial
resources, physical or managerial resources.
Advantages:
• Technological competence
• Optimum use of resources
• Partners are able to learn from each other
Disadvantages:
• Conflicts over asymmetric investment
• Cultural and political stability may pose a
threat to successful operations
• Conflicts in management
Foreign Direct Investment (FDI)
It is a mode of entering foreign market through
investment. Investment may be direct or indirectly
through financial institutions. FDI influences the
investment pattern of the economy and helps to
increase overall development. The extent to which
FDI is allowed in a country is subjected to the
government regulations of that country.
Advantages:
• Modifications can be made at any point of
time
• It is an easy mode of entry
Disadvantages:
• The government policies may not be helpful
• The return on investment may be low
Mergers and Acquisitions
A merger is combination of two or more district
entities into one, the desired effect being
accumulation of assets and liabilities of distinct
entities and several other benefits such as, economies
of scale, tax benefits, fast growth, synergy and
diversification etc. The merging entities cease to be
in existence and merge into a single servicing entity.
Example: Vodafone and Idea formed a new company
VI
Acquisition implies acquisition of controlling
interest in a company by another company. It does
not lead to dissolution of company whose shares are
acquired. It may be a friendly or hostile acquisition
or a bail out takeover.
Example: LIC Acquire IDBI Bank
Strategic Alliance
It is a voluntary formal agreement between two
companies to pool their resources to achieve a
common set of objectives while remaining
independent entities. It is mainly used to expand the
production capacity and increase market share for a
product. Alliances help in developing new
technologies and utilizing brand image and market
knowledge of both the companies.
Example: Apple Pay and Mastercard
Contract Manufacturing
When a foreign firm hires a local manufacturer to
produce their product or a part of their product, it is
known as contract manufacturing. This method
utilizes the skills of a local manufacturer and helps in
reducing cost of production. The marketing and
selling of the product are the responsibility of the
international firm.
Example: Foxconn Technology (local manufacturer)
group that supplies product to high profile companies
like Microsoft, Apple, and Amazon.
Advantages:
• Low-cost of production
• Development of medium and small-scale
industries
• No dilution of control
Disadvantages:
• Difficulty in maintaining quality standards
• Local manufacturers in foreign market may
lose business

DIFFERENCE BETWEEN INTERNATIONAL

AND DOMESTIC BUSINESS
Categories International Domestic
Forms Outside the Inside the
country country
Quality Very high Quite low
Standard
Currency Multiple Single
Currency Currency
Capital Huge Capital Less Capital
Investment Investment Investment
Restriction Many Few
Customer Heterogenous Homogenous
Research Difficult to Conducted
conduct easily
Mobility of Restricted Free
factors of
production
MODULE 2 o Violation can bring serious
retribution
CULTURAL ENVIRONMENT OF
o Theft, adultery, incest, and
INTERNATIONAL BUSINESS
cannibalism
CULTURE o Example: Alcohol drinking in US and
Saudi Arabia
“Culture is that complex whole which includes
knowledge, belief, art, morals, law, custom, and Society
other capabilities acquired by man as a member of
• Society refers to a group of people who share
society.” -Edward Tylor
a common set of values and norms.
“A system of values and norms that are shared among • A society is a group of people bound together
a group of people and that when taken together by a common culture
constitute a design for living.” • There is not a strict one-to-one
correspondence between a society and a
-Hofstede, Namenwirth, and Weber
nation state
• Nation State:
o Is a political creation
COMPONENTS OF CULTURE
o May contain a single culture or
Values several cultures
• Abstract ideas about what a group believes to
be good, right, and desirable.
THE DETERMINANTS OF CULTURE
• Reflect a person’s sense of right and wrong
or what “ought” to be.
• They provide the context within which a
society’s norms are established and justified
• They include attitudes toward
• Individual freedom, Truth, Justice, Honesty,
Loyalty, Social obligations, love, sex,
marriage, etc.
• Values are also reflected in the political and
economic systems
Norms
• Norms are the social rules that govern
people’s actions toward one another. SOCIAL STRUCTURE
• Folkways: Routine conventions of everyday
• Social structure refers to its basic social
life.
organization
o Little moral significance
• Two dimensions that are particularly
o Generally, social conventions such as
important include:
dress codes, social manners, and
o The extent to which society is group
neighborly behavior
or individually oriented.
o Example: Attitude towards time
• Mores: Norms central to the functioning of
society and its social life
o Greater significance than folkways
RELIGIOUS AND ETHICAL SYSTEMS
• Religion: a system of shared beliefs and
rituals.
• Ethical systems: a set of moral principles, or
values, that are used to guide and shape
behavior,
Most of the world’s ethical systems are the product
of religions
• Among the thousands of religions in the
world today, four dominate in terms of
numbers of adherents:
o Christianity with 2.382 billion
adherents
o Islam with 1.907 billion adherents
o Buddhism with 1.161 billion
adherents
o Hinduism with 1 billion adherents
LANGUAGE
Language is one of the defining characteristics of a
culture.
• Spoken language
o Language-based cultures or strata
o Learning local language has
considerable advantage
• Unspoken language
o Include body languages
Example: A circle with thumb and the forefinger – a
friendly gesture in US, a vulgar in Greece and
Turkey.
EDUCATION
Formal education plays a key role in a society.
• It is the medium through which individuals
learn many of the language, conceptual, and
mathematical skills that are indispensable in
a modern society
• Also supplements the family’s role in
socializing the young into the values and
norms of a society
Example: Respect for others, obedience to
authority, honesty, neatness, being on time
• Schools teach basic facts about the social and
political nature of a society, as well as
focusing on the fundamental obligations of
citizenship
CULTURE IN THE WORKPLACE
How a society’s culture affects values in the
workplace?
• Management process and practices of
international business need to vary according
to culturally determined work-related values
• Most famous study by Geert Hofstede, a
psychologist worked for IBM
• Collected data on employee attitude and
values for more than 1 lakh individuals from
1967 to 1973 across 40 countries
• Different cultures were summarized into four
dimensions and created an index score for
each of them
Hofstede’s Four dimensions of culture
• Power distance- cultures are ranked high or
low on this dimension based on the particular
society’s ability to deal with inequalities
• Individualism versus collectivism- this
dimension focuses on the relationship
between the individual and his/her fellows
within a culture
• Uncertainty avoidance- this dimension
measures the extent to which a culture
socializes its members into accepting
ambiguous situations and tolerating
uncertainty
• Masculinity versus femininity- this
dimension looks at the relationship between
gender and work roles
PROBLEMS WITH HOFSTEDE
• Assumes one-to-one relationship between
culture and the nation state
• Research may have been culturally bound
CULTURAL CHANGE
• Culture is not a constant; it evolves over time LESSENING POLITICAL VULNERABILITY
o Since 1960s American values toward
• Good corporate citizenship
the role of women have changed
• Business strategies
o Japan moved toward greater
o Joint venture
individualism in the workplace
o Expanding the investment base
• Globalization will continue to have impacts
o Licensing
on cultures around the world
o Political bargaining

MANAGERIAL IMPLICATIONS
THE INTERNATIONAL LEGAL
• Cross-cultural literacy ENVIRONMENT (CH. 7)
• Culture and competitive advantage
• Bases of Legal Systems
• Culture and business ethics
o Common Law
o Code Law
o Theocratic Law (e.g., Islamic law)
INTERNATIONAL POLITICAL AND LEGAL
• Intellectual Property Rights
ENVIROMENT, AND ECONOMIC o Counterfeiting and piracy
ENVIRONMENT o Inadequate protection
o International conventions
• Business on the Net: Cyberlaw and
THE POLITICAL ENVIRONMENT (CH. 6) unresolved issues
• The Sovereignty of Nations o Domain names
o Ultimate power of the state o Collection of sales tax or duties
• Stability of government policies o Contracts, validity issues
o Forms of Government LAWS AFFECTING BUSINESS
o Political parties
o Nationalism vs. patriotism • Commercial Laws
o Trade disputes, fear, and animosity o Company formation
• Political Risks of Global Business o Marketing laws
o Antitrust laws
o Green marketing issues
POLITICAL RISKS AND MODELS • Foreign Corrupt Practices Act (FCPA)-
extraterritoriality of U.S. laws
• Definition and meaning • Export restrictions
• Common political risks: Confiscation, o Laws, procedures change, get updated
Expropriation, from the Department of Commerce
• Economic Risks: Exchange controls, Local-
content laws, Import restrictions, Tax ECONOMIC ENVIRONMENT
controls, Price controls, Labor problems • Income:
• Risks from Civil Violence, NGOs, Terrorism, • Inflation:
Cyber Crime • Recession:
• Assessing political vulnerability/risk- • Interest Rate:
forecasting risk • Exchange rate:
• Lessening political vulnerability
MODULE 3
EVALUATING THE IMPACT OF FDI
FOREIGN DIRECT INVESTMENT (FDI)
• FDI refers to the flow of capital between
countries. According to the United Nations
Conference for Trade and Development
(UNCTAD), FDI is ‘investment made to
acquire lasting interest in enterprises
operating outside of the economy of the
investor.’
• FDI is distinguished from “portfolio”
investment in that, as well as being “lasting”,
it means that the investor has control over the
assets invested in.
• FDI associated with cross-
border mergers and acquisitions can
be horizontal, vertical and conglomerate.
According to the World Investment Report, FDI
flows in 2013 increased to $1.45 trillion, with
developing countries increasing their share of
inflows to (a record level of) 54 per cent, with Asia
now ahead of both the EU and USA.
Advantages:
• Modifications can be made at any point of
time
• It is an easy mode of entry
Disadvantages:
• The government policies may not be helpful
• The return on investment may be low
INVESTMENT INCOME
Outward investment can lead to increased overseas
investment income for a country, including:
• Profits from overseas subsidiaries.
• Dividends from owning shares in overseas
firms.
• Interest payments, from lending abroad, such
as lending by UK banks.
FDI in the balance of payments accounts appears
in two ways:
• The initial outflow of FDI is entered as an
outflow (debit) on the capital account
• The resulting investment income is entered as
an inflow (credit) on the current account
INWARD INVESTMENT
Countries receiving inward investment gain in a
number of ways, including:
1. An increase in GDP
2. The creation of jobs.
3. Producers have access to the latest
technology from abroad.
4. Less need to import because goods are
produced in the domestic economy.
5. The positive effect on the country’s capital
account – FDI represents an inflow (credit)
on the capital account.
6. FDI is a way of compensating for the lack of
domestic investment and can help ‘kick-start’
the process of economic development.
THE VOLATILITY OF FDI One could also say that ethics reflects on what is the
good and how our lives are oriented towards it

THE IMPORTANCE OF ETHICAL

BEHAVIOR
• Make society better
• Treat everyone equally
• Secure meaningful employment
• Succeed at business
• Fluctuations in monetary conditions • Lessen stress
• Changes in the economic cycle
• Expectations
• Changes in business regulation INTERNATIONAL TRADE AND FACTOR
• Changes in the level of business taxes MOBILITY THEORY
• Wages
• Incentives
• Government Governmental Influence on Trade
• Better alternatives Protectionism- policies that affect the ability of
foreign producers to compete in your home market
limit or enhance your company’s ability to sell
abroad or acquire needed foreign supplies.

Physical and Social Factors Affecting the Flow of

Goods and Services

IMPACTS OF FDI
• Creates New Jobs
• Boosts Wages
• Increases U.S. Exports
• Strengthens U.S. Manufacturing and Services
• Brings in New Research, Technology, and
Skills
Conflicting Results of Trade Policies
• Contributes to Rising U.S. Productivity
• Governments intervene in trade to achieve
economic, social, and political goals
FOUNDATION OF ETHICAL BEHAVIOR • Policymakers are challenged by
o conflicting objectives
Ethics, like philosophy, is in search of principles and
o interest groups
universals. Ethics reflects on a particular human
experience, namely, the experience of the good or of
being good, and sets it in the context of the whole.
The Role of Stakeholders Developing an Industrial Base
• Proposed policies on trade spark debate Countries promote industrialization because it
• Stakeholders include
• brings faster growth than agriculture
o Workers
• brings in investment funds
o Owners
• diversifies the economy
o Suppliers
o Local politicians • brings more income than primary products do
• reduces imports and promotes exports
• helps the nation-building process
Economic Rationales for Government Maintaining Essential Industries
Intervention
• The essential industry argument
Why Governments Intervene in Trade? o protect essential industries so the
Economic Rationales Noneconomic country is not dependent on foreign
Rationales supplies during war
Fighting unemployment Maintaining essential • Countries must
industries o determine which industries are
Protecting infant Promoting acceptable essential
industries practices abroad o consider costs and alternatives
Promoting Maintaining or o consider political consequences
industrialization extending spheres of
influence Promoting Acceptable Practices Abroad
Improving comparative Preserving national
• Import trade controls can be used
position culture
o to promote changes in foreign
countries’ political policies or
Fighting Unemployment capabilities
o as a foreign policy weapon
• The unemployed are the most effective
o to pressure governments to alter their
pressure group
stances on a variety of issues:
• But import restrictions ▪ human rights
o may decrease export jobs because of ▪ environmental protection
price increases for components
o may decrease export jobs because of Preserving National Culture
lower incomes abroad
• In order to preserve national culture,
Protecting ‘Infant Industries’ countries
o limit foreign products and services in
• The infant industry argument certain sectors
o government protection of import ▪ Canada’s cultural sovereignty
competition is necessary to help o prohibit exports of art and historical
certain industries evolve from high items deemed important to national
cost to low-cost production heritage
• Used by developing countries
Instruments of Trade Control
Two types of trade controls
• those that indirectly affect the amount traded
by directly influencing prices of exports or
imports
• those that directly limit the amount of a good
that can be traded
Tariffs
CONCLUDING REMARKS TRADE POLICY
• Tariffs are also known as duties
o refer to a government levied tax on
goods shipped internationally
• Tariffs may be levied
o on goods entering, leaving, or passing
through a country
o for protection or revenue
o on a per unit basis or a value basis
▪ export tariffs
▪ transit tariffs
▪ import tariffs
Dealing with Governmental Trade Influencers
• Companies facing import competition can
o Move abroad
o Seek other market niches
o Make domestic output competitive
o Try to get protection
• Subsidize the production of domestically
produced computers
• Require a “minimum content” before a
computer may be labeled “domestically
produced”
• Prohibit the sale of computers to certain
countries for safety reasons
• There are many different types of trade
restrictions (our analysis is not exhaustive)
• Protection affects different agents in different
ways, hence conflicting interests in the same
country (lobbying)
• Imposing a tariff benefit protected producers
and provides government revenue at the
expense of a welfare loss for the consumers
• Imposing a tariff always generates an overall
welfare loss for a ‘small’ country (protected
sector expands at the expense of a contraction
in other sectors, double distortion)
• A ‘large’ country might benefit from an
‘optimal’ tariff
• These benefits disappear with simultaneous
moves and retaliation, hence the need for
international rules

Tactics For Dealing with Import Competition

• Convince decision makers of the merits of
particular policies
• Involve the industry and stakeholders
• Prepare for changes in the competitive
environment

SOME WAYS TO RESTRICT

INTERNATIONAL TRADE
• Impose a 100 Euro tax per imported
computer (tariff)
• Impose a 12% tax per imported computer (ad
valorem tariff)
• Restrict the number of imported computers
(quota)
MODULE 4 WHAT DOES THE WTO DO?
CROSS-NATIONAL COOPERATION AND • Continues the MFN clause of GATT
AGREEMENTS • Provides a mechanism for dispute settlement
• Criticized for failing to pay enough attention
to labor and environmental concerns;
• Economic Integration • Undermining global diversity and;
o The political and monetary • Benefitting rich at the expense of the poor
agreements among nations and world
regions in which preference is given
to member countries BILATERAL AGREEMENTS
• Bilateral Integration
• Regional Economic Integration • Can be between two individual countries or
• Global Integration can involve one country dealing with a group
of other countries
• Also known as Preferential Trade
World Trade Organization (WTO) Agreements (PTAs)- is a trading bloc that
gives preferential access to certain products
The major body for Reciprocal trade negotiations from the participating countries. This is done
& Enforcement of trade agreements by reducing tariffs but not by abolishing them
completely. A PTA can be established
Reciprocal trade agreement, international
through a trade pact.
commercial treaty in which two or more nations
grant equally advantageous trade concessions to each • Free Trade Agreements (FTAs)- is the region
other. It usually refers to treaties dealing with tariffs. encompassing a trade bloc whose member
For example, one nation may grant another special countries have signed a free trade agreement
schedule of tariff concessions in return for equivalent (FTA)
advantages. Originally reciprocity agreements o Such agreements involve cooperation
involved bilateral tariff reductions that were not to be between at least two countries to
extended to third countries. reduce trade barriers — import quotas
and tariffs— and to increase trade of
goods and services with each other.
GENERAL AGREEMENT ON TARIFFS AND REGIONAL ECONOMIC INTEGRATION
TRADE (GATT)
• Integration confined to a region and
• Formed in 1947 to abolish quotas and reduce involving more than two countries
tariffs
Examples include:
• Most Favored Nation (MFN) clause- trade
without discrimination • European Union (EU)
• Ran into problems: • European Free Trade Area (EFTA)
o Craftier complex methods of trade • North American Free Trade
protection • Association of Southeast Asian Nations
o Trade in services grew exponentially (ASEAN)
• Succeeded by WTO in 1995 • Common Market of Eastern and Southern
Africa (CONESA)
Major Types of Economic Integration
• Free Trade Area- no internal tariffs
 • Customs Union- no internal tariffs plus
common external tariffs
• Common Market- customs union plus factor
mobility
THE EUROPEAN UNION
• Changed from the European Economic
Community to the European Community to
the European Union
• The largest and most successful regional
trade group in the world
• Provides free trade of goods, capital, and
people
• Uses common external tariffs
• Has a common currency

Companies doing business in the EU need to

• Determine where to produce products
• Determine what their entry strategy will be
• Balance the commonness of the EU with
national differences