INTERNATIONAL

BUSINESS - 1
6.53

Unit 1: Introduction to IB:

Prepared by: Prof. Drashti Vaishnav

Introduction :
• Globalization is the ongoing process that deepens and broadens the
relationships and interdependence among countries.
• International Business is a mechanism to bring about globalization.
• The broadening set of interdependent relationships among people
from different parts of a world that happens to be divided into
nations.
• Globalization refers to the shift toward a more integrated and
interdependent world economy. Globalization has several facets,
including the globalization of markets and the globalization of
production.
Prepared by Prof. Drashti Vaishnav
Meaning & Concept of IB:
• International business refers to commercial activities that go
beyond the geographical limits of a country.
• International business relates to any situation where the
production or distribution of goods or services crosses country
borders.
• Definition:
• All commercial transactions—including sales, investments, and
transportation—that take place between two or more countries
• Link: https://www.youtube.com/watch?v=9Hd5RafaVf0

Prepared by Prof. Drashti Vaishnav

Reasons That Firms Engage in International
Business
• To Expand Sales: pursuing
international sales increases the
Expanding potential market and potential profits
sales • To Acquire Resources: may give
companies lower costs, new and
better products, additional operating
Acquiring knowledge
resources
• To Diversify or Reduce Risks:
international operations may reduce
Minimizing operating risk by smoothing sales and
risk profits, preventing competitors from
gaining advantage
Prepared by Prof. Drashti Vaishnav
Globalization & its importance in global
economy:
• INTRODUCTION:
• Globalization is a term used to describe how trade and technology have made the world into a
more connected and interdependent place. Globalization also captures in its scope the economic
and social changes that have come about as a result.
• Globalization is the word used to describe the growing interdependence of the world's
economies, cultures, and populations, brought about by cross-border trade in goods and services,
technology, and flows of investment, people, and information.
• One of the effects of globalization is that it promotes and increases interactions between
different regions and populations around the globe.
• Globalization refers to the integration of the national economy with the global economy. It
enhances cross border trade , investments and exchange of ideas.
• International Business is the means that enables the end of the globalization.

Prepared by Prof. Drashti Vaishnav

Meaning of Globalization:
• The term globalisation refers to the integration of the economy of the nation with
the world economy. It is a multifaceted aspect. It is a result of the collection of
multiple strategies that are directed at transforming the world towards a greater
interdependence and integration.

• It includes the creation of networks and pursuits transforming social, economical,

and geographical barriers. Globalisation tries to build links in such a way that the
events in India can be determined by the events happening distances away.

• To put it in other words, globalisation is the method of interaction and union

among people, corporations, and governments universally.

Prepared by Prof. Drashti Vaishnav

Importance of Globalization in world
economy
Spreading
Technology and Helps With Ensures Better Job Lowers The Costs
Information Across Economic Growth Opportunities of Commodities
Borders

Globalization Globalization
Promotes Cultural Increased
Makes Us More Prepares Us For
Diversity Investment:
Productive Future Challenges

Development of Foreign Exchange

Infrastructure Reserve

Prepared by Prof. Drashti Vaishnav

Importance of Globalization in world
economy:
• Globalization Is Needed For Spreading Technology and Information Across Borders: Globalization is useful
not only for opening doors to new places but also for sharing technology and information across borders so
everyone can benefit from it, especially those who live in less developed countries, so they experience
important improvements which increase their standard of living.
• Globalization Helps With Economic Growth : The world’s economy is expected to grow by 4.9 percent by
2022 – just because of globalization. This shows how globalization can be a big step forward towards
economic growth and prosperity for everyone, encouraging countries to produce more goods and services.
• Globalization Ensures Better Job Opportunities For People : On a similar note, globalization increases the
availability of jobs worldwide which is a great thing for people because more job opportunities mean higher
salaries and living standards, which in turn keeps bringing new money into the economy so it feeds itself
allowing everyone to benefit from globalization.
• Globalization Lowers The Costs of Commodities: When a commodity becomes available from another
region or country, it gets produced there instead of somewhere else, which drives the costs of that
commodity down worldwide. This makes goods and services more affordable for everyone who can then
purchase them.

Prepared by Prof. Drashti Vaishnav

• Globalization Makes Us More Productive : Globalization makes us more productive by enabling
us to use resources from around the world, which allows us to produce better results without
having to increase our efforts or work hours. This is part of what’s known as economies of scale
where businesses can make huge profits by producing more items with less effort and time while
still charging the same price for each item.
• Globalization Promotes Cultural Diversity: One of the best things about globalization is that it
spreads different cultures and traditions worldwide which helps us learn from one another,
making us more tolerant towards those who are different from ourselves as well as accepting our
own differences as something special. This ultimately makes everyone feel appreciated for being
unique individuals.
• Globalization Prepares Us For Future Challenges: The future is unknown, which is why it’s
important to prepare ourselves for whatever might come next. Globalization has made the world
more connected which allows us to work together towards the future by sharing ideas and
experiences that will help us overcome any obstacles we might face, regardless of where they
come from.

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• Increased Investment: Globalisation has led to an increase in cross-border
investments. This has led to companies investing and opening branches in
different countries across the globe. The increase in investment across the
borders has enhanced the welfare of both countries.
• Development of Infrastructure: Technological advancement has helped improve
the infrastructure of countries. With the help of technology, the countries are
achieving overall development.
• Foreign Exchange Reserves: With the help of globalisation, there is a constant
flow of capital in the international financial flows. This capital flow helps
countries build foreign exchange reserves.

Prepared by Prof. Drashti Vaishnav

Impact of Globalization:

Prepared by Prof. Drashti Vaishnav

Positive impacts of globalization
• Increased trade. Globalisation and increased trade mean Country firms can benefit from specialising in
goods where they have a comparative advantage. For example, the Country has a comparative
advantage in goods such as financial services, video gaming and nuclear power components. This
comparative advantage enables higher exports which creates jobs.
• Greater choice of imports. Globalisation has significantly increased the choice of consumer goods. For
example, we have become habituated to the year-round availability of fruit and vegetables due to food
imports.
• Increased competition/lower prices. Globalisation means that domestic monopolies will now face
more international competition. This leads to lower prices for consumers. This is particularly noticeable
in industries such as clothing, electronics and food – where the Country is a net importer.
• Lower costs for firms. Globalisation makes it easier to outsource parts of the production process (e.g.
call centres, web development) to countries with lower labour costs. Firms can make use of technology
to interact with people around the world. This will help reduce costs and prices.
• On the other hand, outsourcing can lead to domestic job-losses and lower quality of service.
• Migration. Globalisation makes it easier for migrants to enter and work in the other country. This free
movement of labour can help the country to fill job vacancies.

Prepared by Prof. Drashti Vaishnav

Negative impacts of globalization:
• Global economic cycle. The UK is more affected by the global economic cycle. For example, a deep
recession in the EU/US will affect the UK, because we rely on the EU and US to export many goods.
Also financial crisis in countries affect the country.
• Raising Unemployment: A problem in US and UK is that many workers feel left behind by the
process of globalisation. They feel globalisation enables firms to make more profit, but workers
struggle to find new employment which matches their previous jobs in turns of job security, pay
and sense of loyalty.
• Unskilled manual labour who have seen a decline in employment opportunities with the structural
change to the economy.
• Tax avoidance. Globalisation has enabled firms to shift production from high tax countries to low
tax countries. Often this is just taking advantage of tax loopholes. For example, companies like
Apple, Amazon and Google have taken advantage of low tax rates in countries like Bermuda,
Luxembourg and Ireland. This means UK treasury loses out on tax revenue.
• Growing inequality. Recent decades have seen growing levels of inequality, with top 1% of income
earners gaining a higher share of income.
• Environment. Globalisation and growing global economy have implications for the environmental
state of the world and the UK. Global warming will impact the country.
Prepared by Prof. Drashti Vaishnav
Factors that Increased Globalization
Increase in and expansion of technology

Liberalization of cross-border trade and resource movements

Development of services that support international business

Growing consumer pressures

Increased global competition

Changing political situations

Expanded cross-national cooperation

Prepared by Prof. Drashti Vaishnav

International Business v/s Domestic
Business
• MEANING:
• Domestic business involves those economic transactions that take
place within the geographical boundaries of a country.
• International business involves those economic transactions that take
place outside the geographical boundaries of a country.
• Link: https://www.youtube.com/watch?v=B1Lv0mAMLsU

Prepared by Prof. Drashti Vaishnav

International Business v/s Domestic Business
COMPARISON DOMESTIC BUSINESS INTERNATIONAL BUSINESS
Meaning A business is said to be domestic, when its International business is one which is engaged in
economic transactions are conducted within economic transaction with several countries in the world.
the geographical boundaries of the country.
Area of operation Within the country Whole world
Quality standards Quite low Very high
Deals in Single currency Multiple currencies
Capital investment Less Huge
Restrictions Few Many
Nature of customers Homogeneous Heterogeneous
Business research It can be conducted easily. It is difficult to conduct research.
Mobility of factors of Free Restricted
production
Scope Less wide
Risk Exposure Low high
Mode of Transport The goods involved in domestic business are The goods involved in international business is mainly
mainly transported by roadways and railways. transported by water and airways.
Prepared by Prof. Drashti Vaishnav
Complexities of IB: (Issues/Problems/challenges of
International Business)
Link: https://www.youtube.com/watch?v=gkqGhtkZJEg
1)Cultural Differences :
Ideology, customs, value system, etc
Error in understanding culture then its cause
problems or major loss to business.
2) Different Accounting Standards & legal
practices:
For Example: India follows Institutions of
Chartered accounts while on USA accounting
standards is developed by Financial Accounting
standards board.
3) Different languages
4) Control more complex due to geographical
distance
5) High Risk
6) Political risk
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7) Uncertainty in Govt Policy
8) Difference in consumers’ taste & preference
9) Bureaucratic Hurdles (Excessive Documentation)
10) Foreign Exchange Fluctuation
(Sometime currency rate is appreciating or
sometimes depreciating, so its not stable)
Thus, unexpecred change in foreign rate cause major
loss in import/export.
11) Opposition by Domestic Manufacturers
12) Technology Piracy (Piracy = Damage/loss)
The domestic manufacturers of host nation may start
manufacturing duplicates of foreign goods so some
foreign companies hesitate to trade.
Modes of entries into International Business
• Exporting
• Licensing
• Franchising
• Turnkey Project
• Mergers
• Acquisitions
• Joint Venture
• Wholly Owned Subsidiary
• Greenfield Venture
• Link: https://www.youtube.com/watch?v=NZSVtQLP4M8
Prepared by Prof. Drashti Vaishnav
Exporting
• An item produced in a domestic market can be sold abroad. Storing
and processing is mainly done in the supplying firm’s home country.
• Export can increase the sales volume.
• When a firm receives canvassed items and exports them, it is
called Passive Export.
• Advantages − Low investment; Less risks
• Disadvantages − Unknown market; No control over foreign market;
Lack of information about external environment
Licensing
• In this mode of entry, the manufacturer of the home country leases
the right of intellectual properties, i.e., technology, copyrights, brand
name, etc., to a manufacturer of a foreign country for a
predetermined fee.
• The manufacturer that leases is known as the licensor and the
manufacturer of the country that gets the license id known as
the licensee.
Licensing
• Advantages − Low investment of licensor; Low financial risk of
licensor; Licensor can investigate the foreign market; Licensee’s
investment in R&D is low; Licensee does not bear the risk of product
failure; Any international location can be chosen to enjoy the
advantages.
• Disadvantages − Limited opportunities for both parties involved;
Both parties have to manage product quality and promotion; One
party’s dishonesty can affect the other; Chances of
misunderstanding; Chances of trade secrets leakage of the licensor.
Franchising
• In this mode, an independent firm called the franchisee does the
business using the name of another company called the franchisor.
• In franchising, the franchisee has to pay a fee or a fraction of profit to
the franchisor.
• The franchisor provides the trademarks, operating process, product
reputation and marketing, HR and operational support to the
franchisee.
Franchising
• Advantages − Low investment; Low risk; Franchisor learns more from
the experience of the franchisees; Franchisee gets the R&D and
brand name with low cost; Franchisee has no risk of product failure.

• Disadvantages − Franchising can be complicated at times; Difficult to

control; Reduced market opportunities for both franchisee and
franchisor; Responsibilities of managing product quality and product
promotion for both; Leakage of trade secrets.
Turnkey Project
• It is a special mode of carrying out international business.
• It is a contract under which a firm agrees – for a remuneration – to
fully carry out the design, create, and equip the production facility
and shift the project over to the purchaser when the facility is
operational.
Mergers & Acquisitions
• In Mergers & Acquisitions, a home company may merge itself with a
foreign company to enter an international business.
• Alternatively, the home company may buy a foreign company and
acquire the foreign company’s ownership and control.
• M&A offers quick access to international manufacturing facilities and
marketing networks.
Mergers & Acquisitions
• Advantages − Immediate ownership and control over the acquired
firm’s assets; Probability of earning more revenues; The host country
may benefit by escaping optimum capacity level or overcapacity level
• Disadvantages − Complex process and requires experts from both
countries; No addition of capacity to the industry; Government
restrictions on acquisition of local companies may disrupt business.
Joint Venture
• When two or more firms join together to create a new business
entity, it is called a joint venture.
• The uniqueness in a joint venture is its shared ownership.
• Environmental factors like social, technological, economic and
political environments may encourage joint ventures.
Joint Venture
• Advantages − Joint ventures provide significant funds for major
projects; Sharing of risks between or among partners; Provides skills,
technology, expertise, marketing to both parties.

• Disadvantages − Conflicts may develop; Delay in decision-making of

one affects the other party and it may be costly; The venture may
collapse due to the entry of competitors and the changes in the
partner’s strength; Slow decision-making due to the involvement of
two or more decision-makers.
Wholly Owned Subsidiary
• Wholly Owned Subsidiary is a company whose common stock is fully
owned by another company, known as the parent company.
• A wholly owned subsidiary may arise through acquisition or by a spin-
off from the parent company.
Greenfield Venture
• Greenfield Venture is a form of market entry strategy with
establishment of a new wholly owned subsidiary in a foreign country
by constructing its facilities from start.
 THANK YOU..
6.53

Prepared by: Prof. Drashti Vaishnav