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Chapter 1 IBT
Chapter 1 IBT
Introduction
WHAT’S IN IT FOR ME?
1. What is international business?
gives you a working definition of international business;
2. Who has an interest in international business?
Helps you see which actors are likely to have a direct and indirect interest in it.
3. What forms do international businesses take?
You’ll then learn about some of the different forms international businesses take;
4. What is the globalization debate?
You’ll also gain a general understanding of the globalization debate. This debate centers
on (1) whether the world is flat, in the sense that all markets are interconnected and
competing unfettered (freely) with each other, or (2) whether differences across countries
and markets are more significant than the commonalities.
5. What is the relationship between international business and ethics?
QUESTION:
Why You Should Study International Business?
It will allow you to understand global issues, hence preparing you for diverse business
opportunities and not limiting yourself to finding a job in your country of study alone, but rather
opening up every country as a possible option for you to start your career.
1.1 What Is International Business?
LEARNING OBJECTIVES
- International trade is the exchange of capital, goods, and services across international
borders or territories. It is the exchange of goods and services among nations of the world.
All countries need goods and services to satisfy their people. Production of goods and
services requires resources. Every country has limited resources; therefore a country
solely cannot produce all the goods and services that it requires. Required goods which
cannot be produced or the amount is insufficient as required, need to be provided from
other countries. Similarly, countries sell their products to others also when the production
of goods comes in surplus quantities than demanded in the country.
Each company that performs any exchange of goods, services or international transactions
outside their country, is a participant in the international market directly or indirectly.
Globalization of international business
Globalization
LEARNING OBJECTIVES
2. Comprehend how strategic management is related to international business.
Strategic management
- The body of knowledge that answers questions about the development and
implementation of good strategies; mainly concerned with the determinants of firm
performance.
- Because strategic management is concerned with organizational performance—be that
social, environmental, or economic—your understanding of a company’s SWOT will help
you better assess how international business factors should be accounted for in the firm’s
strategy.
Strategy
- The central, integrated, and externally oriented concept of how an organization will
achieve its performance objectives.
- SWOT (strengths, weaknesses, opportunities, threats) assessment. The SWOT tool
helps you take stock of an organization’s internal characteristics—its strengths and
weaknesses—to formulate an action plan that builds on what it does well while overcoming
or working around weaknesses. Similarly, the external part of SWOT—the opportunities
and threats—helps you assess those environmental conditions that favour or threaten the
organization’s strategy.
LEARNING OBJECTIVES
3. Understand how entrepreneurship is related to international business.
Entrepreneurship
- An individual or organization whose interests may be affected as the result of what another
individual or organization does.
- Individuals or organizations will have an interest in international business if it affects them
in some way—positively or negatively.
Stakeholder analysis
- A technique used to identify and assess the importance of key people, groups of people,
or institutions that may significantly influence the success of an activity, project, or
business
- International business stakeholders include employees, managers, businesses,
governments, and nongovernmental organizations.
EXERCISES
Why is stakeholder analysis important in international business?
1.3 What Forms Do International Businesses Take?
LEARNING OBJECTIVES
1. Know the possible forms that international businesses can take.
2. Understand the differences between exporting, importing, and foreign direct investment.
3. See how governments and nongovernmental organizations can be international businesses.
Business
- Advantages due to choice of foreign markets and can include better access to raw
materials, less costly labor, key suppliers, key customers, energy, and natural resources.
- For instance, Google locates its computer-server farms—the technological backbone of
its massive Internet services—close to dams that produce hydroelectric power because
it’s one of the cheapest sources of electricity
International Forms of Government
Governmental bodies also take on different international forms
Government
- Generally considered to be the body of people that sets and administers public policy and
exercises executive, political, and sovereign power through customs, institutions, and laws
within a state, country, or other political unit.
- Or more simply, government is the organization, or agency, through which a political unit
exercises its authority, controls and administers public policy, and directs and controls the
actions of its members or subjects.
How do government take on different international forms?
- Maintain embassies and consulates in foreign countries.
- Participate in international treaties related to such issues as trade, the environment, or
child labor.
For example, the North American Free Trade Agreement (NAFTA) is an agreement
signed by the governments of the United States, Canada, and Mexico to create a trade
bloc in North America to reduce or eliminate tariffs among the member countries and thus
facilitate trade.
Nongovernmental Organizations
- 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.
- The shift toward a more interdependent and integrated global economy—creates greater
opportunities for international business. Such globalization can take place in terms of
markets, where trade barriers are falling and buyer preferences are changing. It can also
be seen in terms of production, where a company can source goods and services easily
from other countries
What is the globalization debate?
- It is a stark difference of opinion on how the internationalization of businesses is affecting
countries’ cultural, consumer, and national identities—and whether these changes are
desirable.
- The globalization debate surrounds whether and how fast markets are actually merging
together.
There are several main view point that frame the current thinking of globalization. The first one is
the flat world perspective and the multi-domestic view.
WE LIVE IN A FLAT WORLD
Thomas L. Friedman proposes the notion that the world is flattening— that around the world the
competitive playing field is being level, in terms of commerce, where all competitors have an equal
opportunity. Thomas L. Friedman is an American journalist, author and columnist. He is perhaps
best known for his book, The World Is Flat, A Brief History of the Twenty-First Century. Released
in 2005.
But what does he mean by "flat," and how did the world get that way?
Friedman believes the world is flat in the sense that the competitive playing field between
industrial and emerging market countries is levelling; and that individual entrepreneurs as well as
companies, both large and small, are becoming part of a large, complex, global supply chain
extending across oceans, with competition spanning entire continents.
Globalization has created a level playing field for every organization where they are given equal
opportunities to succeed. Every country has something to gain from it economically.
For example, first world countries like the US take advantage of the cheap labor force that is
offered by countries like China and India. Meanwhile, in return, these countries profited through
various foreign investments.
Example especially with respect to jobs. With the increasing availability of technology, it is no
longer necessary for societies to rely on hierarchical structures for access to information. Today,
information flows horizontally, producing competitors and connecting colleagues from around the
world. An international company can have offices in India, China, Malaysia, or any one of a
growing number of nations that can offer well-educated, cost-effective workers. With the spread
of this phenomenon, the international talent pool of professionals such as computer programmers
and other technology specialists is expanding.
According to Friedman, it is now possible for more people than ever to collaborate and compete
in real time with more people on more different kinds of work from more different corners of the
planet and on a more equal footing than at any previous time in the history of the world.
Discover and discuss why Thomas Freidman says the world is flat and study the 10
flatteners, as well as theories that seek to explain this phenomenon.
1. The first flattener is the coming down of the Berlin Wall on 11 th September 1989 (Beck,
2000). There are a few significant symbolisms in this event. It marks the end of the Cold
War as well as the ability for countries, companies and individuals to join the economic
mainstream that is capitalism. Since the world is no longer divided into communist or
capitalist systems, there is an increase in economic reliance between countries that allows
connections and trades to prosper. Previously, this would have been impossible due to
certain regulations and controls set by the governments. Subsequently, in May 1990,
Microsoft has successfully launched a new and improved version of operating system
called Windows 3.0 that allows personal computing. Now, every individual has the chance
to familiarize themselves with computers and share information in the fastest and easiest
way possible. Friedman has called this period ‘The New Age of Creativity’.
2. The second flattener has got something to do with Netscape going public (Beck, 2000).
With Netscape, the public is, now, introduced with new tools such as the Internet and web
browsers. Everybody can use these inventions to communicate with each other from any
place in the world. Therefore, the world relatively becomes smaller as the Internet has
eliminated any form of physical barriers. Other communications tools such as HTML, a
language use in programming, SMTP for emails and FTP for file transfer have increase
the ability of users from all walks of life to communicate and transfer information through
long distances in a faster and easier manner.
3. Friedman’s third flattener is the existence of a wide range of software standards that allows
every individual to do more using their computers (Boudreaux, 2008). This work flow
software enables countries and companies to work together on various projects. It will be
frustrating if nobody is following a certain standard. Therefore, inventions such as SMTP,
HTML, HTTP, TCP or IP and XML make it possible for computers from anywhere in the
world to receive and read data as well as documents. These first three flatteners are the
base for the next six flatteners.
4. The fourth force is the ability to upload information and content from the computer onto a
network (Boudreaux, 2008). This means that every individual is considered to be an actual
contributor or creator of new information through open source software such as Wikipedia,
YouTube and blogs. Businesses are able to make use of the online experience from these
online communities to their advantage. However, this invention is not entirely taken on the
positive note. Friedman (2007) has suggested that the ability to upload and create
information can be very disruptive. Nobody knows whether this information is true or false.
Since it can be created anonymously and spread within seconds, it can also be the cause
of downfall to many companies.
5. The fifth flattener is outsourcing (Eriksen, 2007). Nowadays, there are more and more
companies that are sub-contracting to a third party in order to cut cost or to increase
efficiency. For example, a major corporation may hire a third party financial company to
do their accounts. The distribution of services or manufacturing products to another party
is probably the best way to perform better and save money. This has become easier
through the installation of fiber optics cable worldwide. Information and data can be
transferred from one company to another from any parts of the world.
6. The sixth flattener is offshoring (Eriksen, 2007). This is when one company moves their
production plant from one country to another country. More often than not, this is spurred
by several reasons such as cheaper labor force, lower taxes and lower health care
remuneration. All these factors will lead to a lower production cost and thus, increase the
percentage of profit. One good example is China. It has been recognized as one of the
center for manufacturing offshoring. Many huge companies such as Apple have set up
factories in China to take advantage of their cheap labor.
8. The eighth flattener is insourcing (Holmes, 2008). This is when one company hires another
company to handle their supply chain. Insourcing flattens the world because it allows small
companies to acquire the same capabilities as global companies, eliminating barriers
between companies and by creating a standardized business practice for companies
around the world. In his book, Friedman has used UPS as one of his major example in
insourcing. This company is hired by Toshiba to repair their computers on their behalf.
This reparation occurs in the UPS hub by their employees without even the need to send
the laptops to a Toshiba factory.
9. The ninth flattener is informing (Scholte, 2005). This aspect deals with the easy access of
obtaining information. Various search engines that are provided by the World Wide Web
such as Google and Yahoo enable the users to search specifically for any information
which they want. These put a lot of power into the people’s hands where users can
communicate, discuss and research about anything and anyone from any place and time
with a click on the mouse.
10. The final flattener is called the steroids (Waters, 2001). According to Friedman, the
steroids consist of other aspects that will help to contribute to the rest of the flatteners to
perform better. There are three types of steroids. They are digital steroids that usually
involves the ever changing trends in computer technology such as voice over Internet
protocol or VOIP, mobile steroids that enable users to work from anywhere such as
wireless Internet access and personal steroids revolve around technology or inventions
that are cheap and small enough to be utilized by individuals such as Napster for sharing
music files online.
Aside from the ten flatteners, Friedman (2007) has also come up with three convergence that
will reinforce the effect of these flatteners on the shifting of the world’s economy. According to
Friedman (2007), the first convergence is the co-dependencies of one flattener to each other.
This means that if one flattener begins to develop, others will follow suit. Meanwhile, the second
convergence suggests the need for companies to come up with new business models.
Companies need to adopt horizontal instead of vertical collaboration in order to boost innovation
and creation. Good business ideas do not just come from the top. Last but not least, the final
convergence talks about the involvement of new countries in the level economic playing field
such as China, Russia and India after the downfall of the Berlin Wall.
SUMMARY
The ten flatteners consist of:
1. The collapse of the Berlin Wall that marks the end of communism and allows every
individual to join the economic mainstream which is capitalism
2. Netscape going public allows everybody to manipulate the web browser as a form of
communication tool to a broader audience
3. Work flow software that enable people or companies from all over the world to
communicate with each other using machines as well as software such as email
4. Uploading are created by communities to share contents that are accessible to anyone
5. Outsourcing allows companies to sub-contract their work to a third party in order to save
money
6. Offshoring give companies the means to take advantage of cheap labor forces in the
manufacturing of their products
7. Supply-chaining involves the distribution of products and services from the manufacturer
or supplier to consumers
8. In-sourcing enables small companies to have the capacity of bigger companies through
logistics
9. In-forming talks about the usage of search engine to gather information
10. And last but not least, the steroids that explains the digitalization of contents and
processes that can be done at any place and time
Although Friedman’s ten flatteners has set an eye opening view regarding the current trend on
globalization, it has also play a pivotal role in the booming economics of Asian countries such as
China, India and Vietnam. Global competition has forced these countries to adopt free trade
policies and to set up the right environment to bring in foreign investors. Consequently, this
creates political and economic stability as these countries have a change in their views on ways
to solve various problems in order to promote diplomatic ties. Among the ten flatteners that are
suggested by Thomas Friedman, outsourcing and off-shoring are probably two of the forces that
have the deepest implication on the development of businesses in Asian countries.
However, many experts also believe that Thomas Friedman’s ten flatteners are a little bit lopsided.
This is because he has only concentrated the effects of globalization focusing mainly on the
economic field. The political and social sectors should also be taken into consideration in order to
provide a thorough conclusion on the ways globalization affect a particular country.
GLOBALIZATION 1 2 and 3
Friedman shares several insights resulting from his experiences during a trip to Bangalore, India,
where he discovers the world is indeed flat!
During his trip to India, Friedman visited several companies changing the way business is
transacted around the world. He met with chief executive officers to gain their perspective on how
business has changed.
As computing power increased, processing speeds multiplied at an exponential rate and
technology became more accessible and cheaper. Advancements in data transmission made it
possible for information to travel around the world in seconds. Technology is the main reason the
world flattened out, making us all global neighbours.
Friedman calls this new globalization of technology Globalization 3.0, which allowed people to
collaborate and compete in real time. Intellectual work can now be dissected, distributed,
returned, and re-assembled in minutes via email. This caused the global competitive playing field
to be levelled or ''flattened.''
Friedman notes that prior Globalizations 1.0 and 2.0 were marked by countries and companies
globalizing respectively. It's now software leading the change, not horsepower or hardware.
Multi-domestic View
Our world is not flat, says economist Pankaj Ghemawat — it's at best semi-globalized, with limited
interactions between countries and economies.
The biggest critics of the “flat world” theory as popularised in Thomas L Friedman’s bestselling
book The World Is Flat: A Brief History of the Twenty-First Century, published in 2005.His most
recent book, World 3.0, based on extensive research and backed up with abundant data, explores
the true face of globalization--and shows that the world is not one vast market, but many small,
interconnected, discrete entities, with varying degrees of openness to one another. That even the
most open economies are still relatively closed. That we live in a world of semi-globalization at
best. Ghemawat also refutes the assumption that globalization leads to homogenization.
His primary argument is that distances still matters — not just physical distance, but also cultural
distance (language, religion, ethnicities), administrative distance (legal, absence of trade
agreement) and economic (consumer income, costs and availability of various resources).
Ghemawat’s biggest problem with Friedman’s flat-world theory is the absence of any data to
support Friedman’s views.
He terms the current times we live in 2.0, or a semi-globalised state. He classifies the world into
four different “worlds”.
- In World 0.0, or prehistoric times, life was nasty, brutish and short, because it was a world
without regulation or government.
- The next phase, World 1.0, came when countries looked inward for everything. Then came
the mercantilist world, when the cross-border flow of goods, capital and people began. To
call ours a globalised or flat world is not appropriate because in his view it is still a “work
in progress”.
CAGE FRAMEWORK
The CAGE Distance Framework is a tool that can be used to uncover important differences
between various countries that companies should take into account when deciding on their
strategy. The acronym CAGE stands for Culture, Administrative, Geographical, and Economic.
The CAGE Distance Framework helps companies because it can evaluate countries and
determine the distance between them. This does not only involve physical geographical distance,
but also figurative distances between various cultures, economies, and working methods.
The CAGE Distance Framework helps organisations find the middle ground between the measure
they use and the measure foreign organisations use. It carefully analyses cultural, administrative,
geographical, and economic forces, as well as determining how a comparable market would
function in a different country.
As a result, a company will be able to very effectively develop a unique range of products and
services that perfectly match the local market conditions and structures. Large international
companies carefully analyse local markets too, using this tool, among others.
Cultural differences
Culture may be defined as a collections of values, norms, rules and convictions that form the
behaviour of people and organisations. A cultural difference between countries may be religion,
ethnicity, or language.
The cultural distance between countries is the first and most important aspect of the CAGE
Distance Framework. It’s also one of the subjects that are least clear to management.
After all, culture is far from always visible, yet it has an enormous impact on the behaviour and
morality of people in the country, or those of employees in an organisation. Those differences can
also be found in various international strategies.
One way of getting a good idea of cultural differences is by using the cultural
dimensions described by Geert Hofstede. His description makes clear, among other things, how
cultures may differ when it comes to avoiding uncertainty, individualism, orientation, and the
balance of power on the job.
Administrative differences
The administrative differences make up the second aspect of the CAGE Distance Framework.
This mainly involves the historical and current legal and political differences between two
countries. It helps the organisation gauge whether these differences are an aid or an obstacle to
the expansion strategy.
Legislation and regulations can have serious effects for the trade practices between various
countries. Corruption, colonial treaties, and trade agreements also fall under administrative
differences.
The most important administrative differences are:
Lack of connections
Lack of a common currency
Lack of membership in international trade organisations
Corruption
Political hostility
Geographical differences
The geographical differences are the third element in the CAGE Distance Framework, and involve
the physical aspect of the distance between two countries. This includes differences such as their
size, transport and infrastructure, climatic differences and other aspects.
It’s also an indication of the distance between two countries in kilometres. Globalisation and
digitisation have made geographical differences a lot easier to bridge, especially thanks to factors
like the internet, social media, and other technology.
Geographical differences between countries may include:
Physical distance
Lack or presence of borders
Different time zones
Differences in climate
Different diseases
Differences in environments
Geographical size
Geographical location
Means of transportation
Means of communication
Means of navigation
CAGE Distance Framework and economic differences
The fourth type of difference in the CAGE Distance Framework involves the differences between
countries with regard to economic aspects such as income, purchasing power, distribution of
wealth, and gross domestic product. This may be a great obstacle for companies, but it can also
provide opportunities.
For example, companies gladly make use of the low wages in certain countries. Economic
differences also involve natural resources, infrastructure, and organisational capacities.
Economic differences include:
Differences between poor and rich
Differences in costs
Differences in quality
Different natural resources
Different financial means
Differences in human resources
Differences in knowledge and access to information
CAGE Distance Framework summary
The CAGE Distance Framework helps the management of organisations that want to expand
abroad to clearly identify differences beforehand in the areas of culture, administration,
geography, and economy.
Professor Pankaj Ghemawat, the developer of the framework, stresses that the differences
between countries may be an opportunity, but could just as easily be the cause of an
organisation’s failure.
ETHICS AND INTERNATIONAL BUSINESS
Ethics are a system of moral principles or rules that say what is and is not acceptable.
Derived from the Greek word “ethos”, which means “way of living”, ethics is a branch of philosophy
that is concerned with human conduct, more specifically the behaviour of individuals in society.
Ethics examines the rational justification for our moral judgments; it studies what is morally right
or wrong, just or unjust.
The goal of ethics in international business is to ensure the company gains a reputation for ethical
and responsible business practices in its home country and overseas. The result is a more
equitable, principled marketplace, strengthened by partnerships between businesses that share
high ethical standards.
Companies conducting their international business ethically realize higher profits by attracting
business partners who share the organization’s commitment to ethics in international business.
A definition of international business ethics begins with a moral code of right and wrong, but
modern business ethics has expanded to encompass supporting social and environmental
causes, and being a responsible member of the communities where the company operates.
Examples of ethical business practices include mandating truthful advertising, instituting internal
quality control checks, and never profiting from insider information:
References