International Business

1) Definition: International business consists of all commercial transactions –

including sales, investments and transportation that take place between two or more
countries. Private companies undertake such transactions for profit, governments may
undertake for profit or for political reasons.
2) Field Of International Business: It is all business transactions –private and
governmental that involves multiple countries. Private companies undertake such
transactions to earn profit; governments may or may not do the same in their
transactions.
3) Reasons & Necessity:
Studying international business is important because
1) Most companies either are international or compete with international companies.
2) Modes of operations may differ from those used domestically.
3) The best way of conducting business may differ by country
4) An understanding help us decide what governmental policies to support.
5) An understanding help us make better career decisions.
4) Why Companies Engage in International Business?
There are three major operating objectives that may induce companies to engage in International
Business:
• Expanding sales
• Acquiring resources
• Minimizing risk
Normally, these three objectives guide all decision engage in international business. Let's examine
each of them in more details:

EXPANDING SALES: A company's sales depend on two factors: interest and consumer willingness
and ability to buy them. For any product or service, then there are more potential consumers and
sales in the world than in any single country. So increased sales are a major motive for a company’s
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 expansion into international markets, and in fact, many of the world's largest companies including
Ericsson (Sweden), IBM (United states), Nestle (Switzerland), and Sony (Japan)--derive more than
half their sales outside their home countries .

ACQUIRING RESOURCES
Producers and distributors seek out products, services, resources, and components from foreign
countries. Sometimes it's because domestic supplies are inadequate. (as is the case with beef shipped
to Japan). They're also looking for anything that will give them a competitive advantage. Sometimes
this means acquiring a resource that cuts costs: Sporting goods companies like Rawlings, for
example, rely largely on labor in Costa Rica, a country that hardly plays baseball, to produce-
baseballs.

MINIMIZING RISK: Operating in countries with different business cycle s can minimize swings in
sales and profit. International operations may reduce operating risk by (i) Smoothing sales and profit
(ii) Preventing competitors from gaining advantages.

5) Why International Business Differs from Domestic Business

Following are the dimensions or factors that makes difference between International Business and
Domestic Business:
 Physical factors (such as a country's geography ) and social factors (such as its political policies,
law, culture, and economy)
 Competitive factors (such as the number and strength of a company’s suppliers, customers, etc.)

PHYSICAL AND SOCIAL FACTORS

Physical and social factors can affect the ways in which companies produce its products, staff
operations, and even maintain accounts.
Geographic factors: Natural conditions affect where different goods and services can be produced.
Political factors: politics often determines where and how international business can take place.
Legal factors: Each country has its own laws regulating business. Agreements among countries set
on the basis of international law.
Behavioral factors: The inter personal norms of a country may necessitate a company’s alteration of
operations.
Economic factors: Economics explains country differences in costs, currency value and market size.

COMPETITIVE FACTOR
A company’s situation may differ among countries by

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 • Its competitive ranking
• The competitors it faces

6) Modes of Operations in International Business:

When pursuing international business, an organization must decide on one of the suitable modes of
operations as under. Among these modes we include exports and imports of both merchandise and service
and foreign investments, both controlled and non¬ controlled. Within these categories we include several
subcategories, such as joint ventures and management contracts. In the following sections, we discuss each
of these modes in some detail.
• Importing and exporting
• Tourism and transportation
• Licensing and franchising
• Turnkey operations
• Management contracts
• Direct and portfolio investment (including joint ventures)
MERCHANDISE EXPORTS AND IMPORTS:
Exporting and importing are the most popular modes of international business, specially among smaller
companies(Merchandise exports are tangible products, goods that are sent out of a country; merchandise
imports are goods brought into a country Because we can actually see these goods as they leave and enter
the country we some times call them visible exports and import.
SERVICE EXPORTS AND IMPORTS
When we refer to products that generate non product international earnings we use that terms service
exports and service imports. Service exports and imports takes many forms such as
• Tourism and transportation
• Service performance
• Asset use
Tourism and Transportation: The economies of some countries depend heavily on revenue from these
sectors. In Greece and Norway, for example, a significant amount of employment and foreign exchange
earnings comes from foreign cargo carried on ships owned by domestically owned shipping lines. Tourism
earnings are more important to the Bahamian than earnings from export merchandise.

Service Performance: Some services-including banking, insurance, rental, Engineering and management
services--net companies earnings in the form of fees payment for the performance of those services.

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Asset use: It includes Licensing agreement, royalties and Franchising etc.
LICENCING AND FRANCHAISING
When one company allows another to use its assets, such as trademarks, patents, copyrights, or expertise,
under contracts known as Licensing agreement. Franchising is a mode of business in which one party (the
franchisor) allows another (the franchisee) to use a trademark as an essential asset of the franchisee’s
business. As a rule, the franchisor (say, McDonald's) also assists continuously in the operation of the
franchisee's business, perhaps by providing supplies , management services, or technology.

TURN KEY OPERATION

On an international level, for example, companies may pay fees for engineering services rendered as so
called turnkey operation.
MANAGEMENT CONTRACTS
Companies also pay fee for Management contracts-arrangements in which one company provides personnel
to perform general and specialized management functions for another. Disney receives such fees for
managing theme parks in France and Japan.

INVESTMENTS
Dividend and interest paid on foreign investments are also considered service exports and imports because
they represent the use of assets (capital). The investments themselves however, are treated as different
forms of service exports and imports. Note first of all that foreign investment means ownership of foreign
property in exchange for a financial return such as interest and dividends. Foreign investment takes two
forms: direct and portfolio.

In foreign direct investment (FDI), sometimes referred to simply as direct investment, the investor takes a
controlling interest in a foreign company.

A portfolio investment is a noncontrolling interest in a company or ownership of a loan made to another,

party. A portfolio investment usually takes one of two forms: Stock in a company or loans to a company
(or country) in the form of bonds, notes bill purchased by the investor.

7.GOALS OF INTERNATIONAL BUSINESS:

1. Understand the overview of international management.
2. Importance of international management
3. Understand political, economic, legal environment

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 4. understand social responsibility and ethics
5. Identify the role of culture in international management
6. Understand cross-cultural communicators.
7. Determine strategy formulation for international mandate
8. Understand cross border alliance.
9. Determine staffing and training for global operators
10.Understand trade agreements
11.Understand the importance of world trade organization
12.Understand motivating and leadership for international staff
13.Understand managing international terms and workforce diversity
14.Understand global labor relations
15.Understand contingency leadership.

8.GLOBALIZATION FORCES:
1) Political:
i) Unification and Socialization
ii) Reduction of Barriers to trade and foreign investment.
iii) Privatization of Former communist nations and opening of economies to global
competition.
2) Technology: Advances in computers & Communications, Internet & Network
3) Market: Also become global customers
4) Cost: Economic of scale to reduce unit costs are always a management goal. One
means of achieving them is to globalize product lines to reduce development
production & inventory cost
5) Competitive: New firms, may form newly industrialized and developing countries,
have entered world markets. Some companies are defending their home markets to
absorb them. The result of both cases rush to globalization and explosive growth in
international.

9.FORCES IN THE ENVIRONMENTS:

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 1 Competitive: Kinds and numbers of competitors, their locations and their
activities
2 Distributive : National and International agencies available for distributing
goods & Services
3 Economic: Variables ( GNP, Labor Cost, Personal Consumptions,
Expenditures) that influences a firm’s ability to do the business
4 Socioeconomic : Characteristic and distribution of the Human Population
5 Financial: Variables such as interest rates, inflation rates and taxation.
6 Legal: Foreign and Domestic laws by which international firms must operate.
7 Physical: Topography, climates and natural resources.
8 Political: Nationalism, forms of Government and international organizations
9 Sociocultural: Attitude, beliefs and opinions
10 Labor: Composition, skills and attitude of labor
11 Technological: The technical skills and equipment

10. Reasons for dramatically changes of I.B

1) Market expansion
2) Resource acquisition
3) Competitive forces
4) Technological changes
5) Social changes
6) Changes in governmental Trade & Investment policies
11. Types of International Trade:-

1) Import 2) Export 3) Barter-Exchange of Products or Service

2) Hidden Trade-i) Smuggling-Illegal transfer of product between the territories
ii) Hundi-Unauthorized transfer of money between territories

12. DECESSION FACTORS FOR CHOOSING A MODE OF ENTRY

OF INTERNATIONAL BUSINESS

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 1) Ownership advantages
2) Location advantages
3) Internalization advantages
4) Other Factors:
i) Need for control
ii) Resource availability
iii) Global strategy

13. MODES OF ENTRY

13.1 Exporting:
i) Direct export
ii) Indirect export
iii) Intracorporate transfer-is the selling of goods by a firm in one country to an
affiliated firm in another.

Primary Advantages of Exporting:

1) Relatively low financial exposure
2) Permit gradual market entry
3) Acquire knowledge about local market
4) Avoid restriction on foreign investment

Primary Disadvantages of Exporting:

1) Defenseless to tariffs and NTBs
2) Logistical complexities
3) Potential Conflicts with distributors

13.2 International Licensing-a firm (licensor) leases the right to use its intellectual
property (technology, work methods, patents, copyrights, brand names, or
trademarks) to another firm (licensee), in return for fee.
Basic issues/considering point/steps in international licensing
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 1. Specifying the agreement’s Boundaries
2. Determining Compensation
3. Establishing Rights, Privileges, and constraints
4. Resolving Disputes
5) Specifying the Agreement’s Duration.

Advantages of Licensing:
1) Low financial risk
2) Low –cost way to assess market potential
3) Avoid tariffs, NTBs, restrictions on foreign investment
4) Licensee provides knowledge of local markets.
Disadvantages of licensing:
1) Limits market, opportunities/ profits
2) Dependency on licensee
3) Potential conflicts with licensee
4) May be creating future competitor

13.3 International Franchising: A franchising agreement allows an independent

entrepreneur or organization (franchise), to operate a business under the name of another
(franchisor), in return for fee. The franchisor provides it franchisee with trademarks,
operating systems, and well known product reputations, as well as continuous support
services such as advertising , training, reservation services and quality assurance programs.

Basic issues/considering point/steps in international Franchising

1. The Franchisor has been successful domestically because of unique products
and advantageous operating procedures and systems.
2. The factors that contributed to domestic success should be transferable to
foreign location

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 3. The franchisor has already achieved considerable success in its domestic
market.
4) There must be foreign investors who are interested in entering into franchise
agreements.

Characteristics of Franchising
1) A good track record of profitability
2) Built around a unique or unusual concept
3) Broad geographic appeals
4) Relatively easy to operate
5) Relatively inexpensive to operate
6) Easily duplicated

Advantages of Franchising:
1) Low financial risks
2) Low –cost way to assess market potential
3) Avoid tariffs, NTBs restrictions on foreign investment
4) Maintain more control than with licensing
5) Franchisee provides knowledge of local market
Disadvantages of franchising:
1) Limits market opportunities/ profits
2Dependency on franchisee
3) Potential conflicts with franchisee
4) May be creating future competitor

SOCIAL FRANCHISEE
In recent years, the idea of franchising has been picked up by the social enterprise sector,
which hopes to simplify and expedite the process of setting up new business. A number of
business ideas, such as soap making, whole food retailing, aquarium maintenance and hotel

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operation, have been identified as suitable for adoption by social firms employing disabled
and disadvantaged people.

Specialized Entry Modes for International Business

13.4 Contract Manufacturing: Aims to reduce the amount of financial and
human resources devoted to the physical production of products.
Advantages of Contract Manufacturing:
1) Low financial risks
2) Minimize resources devoted to manufacturing
3) Focus firm’s resources on other elements of the value chain

Disadvantages of Contract Manufacturing:

1) Reduce control, may effect quality, delivery schedules etc.
2) Reduce learning potential
3) Potential public relations problems- may need to monitor working conditions etc

13.5 Management Contract: is an agreement whereby one firm provides

managerial assistance, technical expertise, or specialized services to a second firm
for some agreed-upon time in return for monetary compensation.

Advantages of Management Contract:

1) Focus firm’s resources on its area of expertise
2) Minimal Financial exposure

Disadvantages of Management Contract:

1) Potential returns limited by contract
2) May unintentionally transfer proprietary knowledge and techniques to contractee
13.5 Turnkey Project: is a contract under which a firm agrees to fully design,
construct, and equip a facility and then run the project over to the purchaser when
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 it is ready for operation. The alternative term is B-O-T ( Builds a facility, Operates
it & Transfers ownership)

Advantages of Turnkey Project:

1) Focus firm’s resources on its area of expertise
2) Avoid all long –term operational risks

Disadvantages of Turnkey Projects:

1) Bear financial risks such as overruns cost
2) Bear construction risks such as delays, problems with suppliers

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