TABLE OF CONTENTS CHAPTER ONE: Introduction to International Business and the Rise of Globalization. The Evolution of the Concept of International Trade and Business... Types of International Business Companies. Benefits of International Business... The Rise of Globalization... The Two Facets of Globalizatior The Drivers of Globalizatio Benefits of Globalization Costs of Globalization . QUIZ NO. 1. CHAPTER TWO: Theoretical Aspects ... Theory of Absolute Advantage .. Theory of Comparative Advantage... Heckscher-Ohlin Theory... Other Trade Theories... QUIZ NO. 2... CHAPTER THREE: Applications ..riers... Commonly Used Types of Trade Bal Quiz NO. 3. ess Environment .... CHAPTER FOUR: International Busine Cultural Dynamics. Hofstede’s Four Dimensions of Culture .. Trompenaars’s Seven Dimensions of Culture ... The GLOBE Project's Nine Dimensions of Culture .... Political Considerations and Economic Dimensions The Financial Market Framework. The International Monetary Fund QUIZ NO. 4. CHAPTER FIVE: Philippine Export Experience... Export Trends and Direction... Composition of Exports. Performance of SMEs. QUIZ NO. S.. CHAPTER SIX: Assessing Capabilities and Potential... Identifying Trade Opportunitie: Analyzing Domestic Capabil QUIZ NO. 6...CHAPTER SEVEN: Assessing Export Industries Industry Structure. Exportation Performance... QUIZ NO. 7. CHAPTER EIGHT: Appraising Foreign Markets International Market Assessment .... Product Strategies .. Product Promotion QUIZ NO. 8... CHAPTER NINE: Business Considerations .. Organization Strategy and Structure .. Human Resources Strategy Financial Requirements and Management 147 QUIZ NO. 9. CHAPTER TEN: Ethics in International Business. Ethical Dilemmas... Philosophical Approaches to Business Ethics Ethical Decision Making...QUIZ NO. 10.. CHAPTER ELEVEN: Career Opportunities in International Business Whatis an international businessperson?.... Entry-level Jobs and Salaries... Qualifications... In-Demand International Business Careers... QUIZ NO.11.. Bibliography...CHAPTER ONE: Introduction to International Business and the Rise of Globalization Chapter objectives: 1. to gain understanding of the concept of international businesses 2. to contextualize how globalization took place in the history of trade 3. to explain the two sides of globalization As countries continue to progress individually in terms of local industries and national economies, their relationship with other countries trade-wise also evolves. In the latter part of the twentieth century, countries have been. becoming more open towards international trade and business, paving the way for better economies, better markets, and better global industrial harmony. These country to country business trade is called International Business. It is described as the purchasing and selling of goods, s, and services of a country outside of its own borders. International Business is business done outside the origin country’s commodi national border. With the advancement of technology, businesses that were able to achieve self-sustainability in their own country have ventured into international connections, extending their services and/or products to other countries. These businesses are not limited to goods andAyamuitactarliyg lndiiatilan, hut alse Includes the service industyy, Ong Tone huations activition avtondar cross the national horders, the °Y arg alroaty Considered as an liternatianal business COM panion and histhess arqanieatlons today are no longer Mitlag WIN flit a focal Wlontily, Multinational erjanizations have mergeg (hough the previous contury not only inane country bul across the globe. International trade seemed to make for a small world and changed the way businesses are conducted, Industrles are no longa, timited to local markets, they no longer depend upon local resources, Husmesses setup manufacturing wherever It ls conducive in terrns of Cheaper resource availability as well as support from local government, and in terms of markets, geographical boundaries do not bother them, They are literally everywhere, Jechnology, In terms of communication as well as software technology, has changed the way business organizations manage activities ranging from manufacturing, procurement, finance, and sales, The advancement of software applications drive the trade processes, working efficiently at the speed of thought. In our present day, no country can afford to remain isolated from and not participate In globalization, While countries do open their economles to global competition, they need to tread very carefully not to upset their domestic economy and protected industries. This balancing act Is often managed through Ind|vidual countries trade and tariff policy, which forms a part of each country’s foreign trade policy that governs Its approach to International trade and commerce.The Evolution of the Concept of International Trade and Business To know the history of international business is to go back as far as the barter system. ® Ancient records show that merchants from the 19" century BE have been participating in different barter modes and routes of trade — most of the trading happens in the seas and ports, with goods such as silk, spices, and precious stones. This paved the way for the creation of the Silk Road and the Spic Route. e Mercantilism in England spread, the first systematic body of thought focused on international trade. This school of thought argued that there should always be a ‘favorable balance’ in trade. This balance, according to mercantilism writers, is a trade in which the domestic goods exported are more valuable than the goods that are imported. In general, mercantilism favors exportation heavily and importation less. e In 1776, Adam Smith — the father of Economics — published his book entitled An Inquiry into the Nature and Causes of the Wealth of Nations, fundamentally challenging mercantilism. Even though there were a number of people against the concept of mercantilism, only a handful were advocating for the concept of free trade. Smith’s book provided the spark that would soon spread the concept of international trade. In his book, he argued that a nation’s economic growth is dependent on its specialization and labor division. Specialization means greater productivity, as it means a country can focus on producing what it does best, concentrating the use of resources into a specific good. Labor division, on the other hand, is constrained by the limits of mercantilism, as its markets are small. With Smith’s economic thinking, division of labor would support the concept of specialization as it has a larger market.Putting two and two together, Smith’s concept of internationay trade allows for a larger market and an increased productivity worldwide, Smith also argued against mercantilism’s expory subsidies which are payments to domestic firms that enable them to reduce their price to foreign consumers. He argueq that if a certain trade was unprofitable for private businesses it was unlikely that it would be profitable for the nation. Asidg from this argument, Smith also argued against import restrictions of mercantilism. He contended that these restrictions only encourage monopoly and discourage competition. Monopoly then encourages the sole market providers to increase their prices as high as they want, proving that monopolized industries turn inefficient and self-serving in the long run. In the first quarter of the 19" century, David Ricardo, as well as James Mill and Robert Torrens, introduced the theory oj comparative advantage. Ricardo’s theory, published in his book Principles of Political Economy, further reinforced the idea of free trade. The theory of comparative advantage suggests that a country export goods in which its relative cost advantage, and not their absolute cost advantage, is greatest in comparison to other countries. Suppose that the United States can produce both shirts and automobiles more efficiently than Mexico. But if it can produce shirts twice as efficiently as Mexico and can produce automobiles three times more efficiently than Mexico, the United States has an absolute productive advantage over Mexico in both goods but a relative advantage in producing automobiles. In this case, the United States might export automobiles in exchange for imports of shirts—even though it can produce shirts more efficiently than Mexico. The practical import of the doctrine is that a country may export a good even if a foreign country could produce i!more efficiently if that is where its relative advantage lies; similarly, a country may import a good even if it could produce that good more efficiently than the country from which it is importing the good. The comparative advantage proposition is incredibly counterintuitive: it states that a less developed country that lacks an absolute advantage in any good can still engage in mutually beneficial trade, and that an advanced country whose domestic industries are more efficient than those in any other country can still benefit from trade even as some of its industries facing intense import competition. The anti-mercantilism movement won the world’s ideologies, hence countries began to plan their international pacts and policies were made, including tariff-free importation. By 1913, the world was immersed in free trade — all currencies can be converted to gold, with the gold becoming an international monetary currency accepted anywhere in the world. Anyone can establish a new business anywhere, anyone can work fora living anywhere. Global trade and businesses were alive and blooming. However, the freedom of international trade did not last too long. The First World War changed the entire course of the world trade and countries began to build walls around themselves with wartime controls. Even after the war ended, countries were still picking up the pieces of their own economies, trying to get back on their feet and gradually opening up trade policies again. However, the war brought along an economic recession in 1920, further changing the situation of global trade. Countries had to reassess their trade policies, leading to imposing of tariffs on imports and customs duties. With the global economic imbalance and unstable condition, world leaders, headed by the League of Nations, held the World. Peonomle Conterence in May 1927 this Conference opened ons an haw to ease the international trade, » door to aiseussl tho door tod ding to the establishment of presses, ley issuios and ec anonle ent, the Multilateral Trade Agree AgraeMentss the world fac ‘ed another disruption, ring the 190s, This led to countries dl goods, This depression then Despite these with another depression du further raising, tarifts on Imparte eat the way for another League ¢ General Agr ) of Nations conference jn pay toa, establishing the eement on Tariffs ang Trade, nthe constant change in the global market and economies, countries slowly accepted the idea that old schools of thought will need to adapt to the changing times, and that they had to keep reviewing their international trade policies on a constant basis, This further lead to all countries agreeing to be guided by and trade agreements in terms the international organizations of international trade. What really provided a boost to the global expansion of companies was the Chicago School of Economic Thought propelled by the legendary economist, Milton Friedman, which championed neoliberal globalization. This ideology, which started in the early 1970s gradually, became a major force to reckon with in the 1980s and became the norm in the 1990s, The result of all this was the hyperactive expansion of global companies across the world, Today, the concept of international trade and business is ina much better place in terms of freedom and management. Global competition affects nearly every company—regardless of size. Many source suppliers from foreign countries compete against products or services that originate abroad. International business remains a broad concept that encompasses the smallest companies that may only export ofimport with one other country, as well as the largest global firms with integrated operations and strategic alliances around the globe. International businesses grew in scope and size to the point where at the moment; the global economy is dominated by multinationals from all countries in the world. What was primarily a phenomenon of western corporations has now expanded to include companies from the East (from countries like India and China). Types of International Business Companies Multi-domestic © A strategic business model that involves promoting products and services in various markets around the world and adapting the product/service to the cultural norms, taste preferences and religious customs of the various markets. It is an organization with multi-country affiliates, each of which formulates its own business strategies based on perceived market differences. Multinational o A business strategy that involves selling products and services in different foreign markets without changing the characteristics of the product/service to accommodate the cultural norms or customs of the various markets. Also dubbed as Global companies, these organization attempts to standardize and integrate operations worldwide in all functional areas. International© This type could either be multidomestic multinational. International businesses have to ensun, that they blend the global outlook and the locay adaptation resulting in a “glocal” phenomenon where, they would have to think global and act local, Further, international businesses need to ensure that they do operate within local laws and at the same time repatriate profits back to their home countries, They have to ensure that they have a set of Operating procedures and norms that are sensitive to the locaj culture and customs and at the same time, they stick to their brand that has been developed for global markets, Apart from this, the questions of employability and employment conditions that dictate the operations of global businesses have to be taken into consideration as well. = DOMESTIC MARKET EXTENSION BY EXPORTING: Firms following this strategy locate all production function and as many as the marketing function as possible in the home country. Export managers must be knowledgeable about any differences between domestic and foreign environmental forces that could have impact on the marketing mix. = MULTI-DOMESTIC COMPANY: Similar to a Holding company — strong financial control from head quarters but whose subsidiary have considerable autonomy in formulating their own business strategies based on perceived market differences Headquarter managers maintain veto power,™ GLOBAL CORPORATION: Management of global corporation look at the world economy as the single market. There is a strong central authority with global managers of functional areas such as marketing and production etc. who attempt to standardize their operations worldwide and there is no international division. Managerial functions such as strategic planning and budgeting are performed globally. Benefits of International Business The rise of international trade is beneficial to both the nation and the businesses. Ben to Nation It encourages a nation to obtain foreign exchange that can be utilized to import merchandise from the global market. It prompts specialization of a country in the production of merchandise which it creates in the best and affordable way. Also, it helps a country in enhancing its development prospects and furthermore make Opportunity for employment. International business makes it comfortable for individuals to utilise commodities and services Produced in other nations which help in improving their standard of life. Benefits to Firms It helps in improving profits of the organizations by selling Products in the nations where costs are high. It helps the organization in utilizing their surplus resources and increasing Profitability of their activities. Also, it helps firms in enhancing their development prospects.International business also goes as one of the methods fo accomplishing development in the firms confronting extrem, market conditions in the local market. * Lastly, it enhances business vision as it makes firms Mor, aggressive and diversified. The Rise of Globalization When the world grew to be interdependent when it comes to th global economy, it also achieved globalization. But what is globalization? * Post-Cold War, the term was used to describe the worl becoming more interdependent in its economical an informational dimension. As it was still a complex concept then definitions of globalization centered only on this aspect. e Roland Robertson, a professor of sociology at the University o Aberden, was the first person who defined globalization as "the understanding of the world and the increased perception of the world as a whole." * Sociologists Martin Albrow and Elizabeth King define the term as "all those processes by which the peoples of the world are incorporated into a single world society.” * Anthony Giddens, in his paper entitled "The Consequences o Modernity", uses the following definition: "the globalization can be defined as the intensification of social relation: throughout the world, linking distant localities in such a way that local happenings are formed as a result of events that occur many miles away and vice versa.” ¢ David Held studies the definition of globalization and says, “although in a simplistic sense globalization refers to a rapid global interconnection, deep and on large scale, such definition 10but requir ww a more complex resear his paper i quires no’ ch” in his p. ip "Global Transformations”. © The Swedish journalist Thomas Larsson, in his book “Th to the Top: The Real Story of Globalization” =a pond globalization “is the process of the shrinking of the world the and the closeness of things. It allows erson on one part of the her side of the world, in shortening of distances, d interaction of any P' the increase d on the ot! world to someone foun order to benefit." lization is nota new t global nal m self-contained natio! II these definitions, itis safe to say tha ted global economic orld leaned away frol integra with al phenomenon. As the w' economies toward an interdependent, system, globalization took place- s of Globalization The Two Facet Markets The Globalization of palization © ing of historically fe huge global “philippine 5 to the meré into on ket” oF market effectivelY reduc “ The tastes and predilection® bal market by offering the ing the needs erate oridwid 11The Globalization of Production The globalization of production refers to tI services from locations around the globe to take advant y differences in the cost and quality of factors of production like labor, and capital. Companies compete more effectively by low their overall cost structure or improving the quality or furicticr he sourcing of goad, . their product offering. Benefits: *® More companies are communications technology, like the Internet, to outsourc service activities to low-cost producers in other nations. © Because of these tech advancements, companies are 2b! outsource even technical experts without losing full contral ¢ taking advantage of moder their production. The Drivers of Globalization Falling Barriers This refers to declining trade and investment barriers. Internatione trade occurs when a firm exports goods or services to consumers in another country. Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country. After the World War Il, advanced countries made a commitment t lower barriers to trade and investment. Since 1950, average tariff have fallen significantly and are now at about 4%Countries have alst been opening markets to FDI. Lower barriers to trade and investment mean that firms can view the world, rather than a single country, as their market and that firms cat base production in the optimal location for that activity. mm 12Technological Changes While the lowering of trade barriers made globalization of markets and production a theoretical possibility, technological change made it a tangible reality. ® Microprocessors and Telecommunications: Major developments in communications and information processing have dropped the cost of global communication, along with this the cost of coordinating and controlling a global organization was also lowered. « The Internet and the World Wide Web: Web-based transactions have increased from practically zero in 1994 to approximately $7 trillion in 2004. ¢ Transportation Technology: the most important developments are probably the development of commercial jet aircrafts and super freighters along with the start of containerization, simplifying trans-shipment from one mode of transport to another. Improvements in transportation technology have enabled firms to better respond to international customer demands. Managers today operate in an environment that offers more opportunities, but is also more complex and competitive than that of a generation ago. Implications of technological change for the globalization of production include: «lower transportation costs that enable firms to disperse production to economical, geographically separate locations 123* lower information processing and communication costs thy enable firms to create and manage globally disperse production systems Implications of technological change for the globalization of market include: ¢ low cost global communications networks help creat electronic global marketplace ¢ low-cost transportation help generate global markets © aworldwide culture created by global comms networks, as we as a global market for consumer products Benefits of Globalization © Free trade: A way for countries to exchange goods an resources. This means countries can specialise in producing goods where they have a comparative advantage (this mean: they can produce goods at a lower opportunity cost). * Free movement of labour: Increased labour migration gives advantages to both workers and recipient countries. If a country experiences high unemployment, there are increased Opportunities to look for work elsewhere. This process ol labour migration also helps reduce geographical inequality. This has been quite effective in the EU, with many Eastern European workers migrating west. © Increased economies of scale: Production is increasingly specialised. Globalisation enables goods to be Produced in different parts of the world. This greater specialisation enables lower average costs and lower prices for consumers, 14Groater competition: Domestle monopolies used to be protected by a lack of competition, However, globalisation moans that firms face greater competition from foreign firms, sed levels of investment, It has made it easier for countries to attract short-term and long-term Investment. Investment by multinational companies can play a big role in improving the economles of developing countries. Increased Investment: Globalisation has also enabled incre Costs of Globalization Free trade can harm developing economies. Developing countries often struggle to compete with developed countries, therefore it is argued free trade benefits developed countries more, There is an infant industry argument which says industries in developing countries need protection from free trade to be able to develop. However, developing countries are often harmed by tariff protection, that western economies have on agriculture. Paradox of Free Trade Environmental costs. One problem of globalisation is that it has increased the use of non-renewable resources. It has also contributed to increased pollution and global warming. Firms can also outsource production to where environmental standards are less strict. However, arguably the problem is not so much globalisation as a failure to set satisfactory environmental standards. Labour drain. Globalisation enables workers to move more freely. Therefore, some countries find it difficult to hold onto 1516 4 their best-skilled workers, who are attracted by higher Wag. elsewhere. Less cultural diversity. Globalisation has led to increas. economic and cultural hegemony. With globalisation there, arguably less cultural diversity; however, it is also led to Mor, options for some people. Tax competition and tax avoidance. Multinational companie. like Amazon and Google, can set up offices in countries like Bermuda and Luxembourg with very low rates of Corporatio, tax and then funnel their profits through these subsidiaries This means they pay very little tax in the countries where the, do most of their business. This means governments have t, increase taxes on VAT and income tax. It is also seen as unfair competition for domestic firms who don’t use the same ta avoidance measures.CHAPTER TWO: Theoretical Aspects Chapter objectives: 1, to elaborate on the theory of absolute advantage 2, to comprehend how the theory of comparative advantage works in reality 3, to be familiar with other theorles of trade In order to further understand the pattern in international trade, theories explaining aspects of it have been postulated over the years. These concepts largely influence how and why nations and businesses devote resources to the production of particular goods. Theory of Absolute Advantage According to Adam Smith, countries should only produce goods that they have an absolute advantage in. An individual, business, or country is said to have an absolute advantage if it can produce a good at a lower cost than another individual, business, or country. Furthermore, when a producer has absolute advantage, it also means that fewer resources and less time are required to offer the same amount of goods as compared to the other country. This greater overall efficiency in production creates an absolute advantage, which allows for beneficial trade—this is because producers are able to specialize and then, through trade, benefit from other producers’ specialization. Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism because the export of one nation is another nation’s import and instead stated that all nations 25would gain simultaneously if they practiced free trade and specializey in accordance with their absolute advantage. Smith also stated that th h of nations depends upon the goods and services available ty wealt! 'e are possibl, their citizens, rather than their gold reserves. While thers gains from trade with absolute advantage, the gains may not be mutually beneficial. Comparative advantage focuses on the range o possible mutually beneficial exchanges. As an example, if Japan and Italy can both produce automobiles, bu, Italy can produce sports cars of a higher quality and ata faster rate wit} greater profit, then Italy is said to have an absolute advantage in tha particular industry. In this example, Japan may be better served t devote the limited resources and manpower to another industry 9 other types of vehicles, such as electric cars, in which it may enjoy a absolute advantage, rather than trying to compete with Italy! efficiency. This theory, however, rests on a few assumptions made by Smit himself, While influential and insightful, the theory of absolut advantage is not always entirely accurate because many of thes fundamental assumptions are in fact not true in reality. Here are th most significant of these assumptions: e Lack of Mobility for Factors of Production © Adam Smith assumes that factors of production cant move between countries. This assumption also implt that the Production Possibility Frontier of each count will remain the same after the trade. © Trade Barriers 04 © There are no barriers to trade for the exchange Of , Governments implement trade barriers to restrict 26 aThis theory relies on a few factors to work: Factors of Production © Amajor factor that affects comparative advantage is the country’s quality and quantity of the factors of production. For example, the natural availability of mineral resources like iron, gold, and copper is not something a country can change. Exchange Rate © Movements in exchange rates affect the prices of imported and exported goods. For example, if your home currency depreciates which means foreign currency can buy more of your home currency, then your exports will increase as your goods are cheaper relative to others. Inflation © Anincrease in the rate of inflation would make exported goods more expensive and imported goods cheaper. Trade Barriers o Subsidies and taxes are examples of trade barriers that can be implemented by the government to create an artificial comparative advantage. A subsidy would make exports more competitive and a tax would discourage imports, For example, assume that China has enough resources to produce either smartphones or computers. China can produce 10 computers or 10 smartphones. Computers generate a higher profit. Therefore, the Opportunity cost is the difference in value lost from producing a smartphone rather than a computer. If China earns $100 for a 29computer and $50 for a smartphone then the opportunity cost isg If China has to choose between producing computers ® smartphones it will select computers. Comparative advantage theory also rests on a few assumptions a criticisms that may or may not always be true for most cases: 30 Constant Returns to Scale o The theory of Comparative Advantage assumes thatt costs remain constant for producing any number goods. This means that if you require 2 hours to ma one shirt, then you will spend 10 hours to make § shirts, 20 hours to make ten shirts, etc. In reality, co will go down because of economies of scale. Mobility © There is perfect mobility of the factors of productic This means that we assume that we can move any faci of production to any part of the country at any time. reality, we cannot move factors of production easily. Costs co. There are no transportation costs, i.e. it does not ci anything to move goods from one place to another. Tl assumption is also not rooted in reality. Free Trade © Free trade exists between the two countries. Tt means there are no barriers to trade. Perfect Competition © The theory also assumes that there is always competition in whatever good or service is offered. THis not always the case in reallty, as there are monopolies and oligopolies. Consider this example agaln: ‘Assume that Ghana is more efficient in the production of both cocoa and rice. In Ghana, it takes 10 resources to produce one tone of cocoa, and 13 1/3 resources to produce one ton of rice. So, Ghana could produce 20 tons of cocoa and no rice, 15 tons of rice and no cocoa, or some combination of the two. In South Korea, on the other hand, it takes 40 resources to produce one ton of cocoa and 20 resources to produce one ton of rice. So, South Korea could produce 5 tons of cocoa and no rice, 10 tons of rice and no cocoa, or some combination of the two. With trade, Ghana could export 4 tons of cocoa to South Korea in exchange for 4 tons of rice. Ghana will still have 11 tons of cocoa, and 4 additional tons of rice. South Korea still has 6 tons of rice and 4 tons of cocoa. If each country specializes in the production of the good in which it has a comparative advantage and trades for the other, both countries gain. Comparative advantage theory provides a strong rationale for encouraging free trade. Heckscher-Ohlin Theory Based on Ricardo’s comparative advantage theory, Eli Heckscher and Bertil Ohlin challenged the assumptions of Ricardo’s theory. The Heckscher-Ohlin Model describes the interaction of relative abundance of factors and relative intensity of their use in different production processes. 31