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Section One The Nature of International Business

by Ball, McCulloch, Frantz, Geringer, and Minor

The Rapid Change of International Business

This chapter covers: Internationalization of markets Various names given to firms in multiple countries Effect of the internet on international business Drivers leading firms to globalization of product Differences between domestic and international businesses Three environments of international business

International Business by Ball, McCulloch, Frantz, Geringer, and Minor

McGraw-Hill/Irwin Copyright 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives
Appreciate the dramatic internationalization of markets. Understand the various names given to firms that have substantial operations in more than one country. Appreciate the profound effect of the Internet on many international business firms. Understand the five kinds of drivers that are leading international firms to the globalization of their operations. Comprehend why international business differs from domestic business. Describe the three environments--domestic, foreign, and international--in which an international company operates

International Business Experience

Seventy-nine percent of CEOs believe all business majors should have an introductory international business course Seventy percent will consider expertise in foreign language and international exposure in hiring decisions The majority of CEOs consider courses related to international business relevant to their company Managers wanting to advance will need to have foreign experience


International Business Terminology

The United Nations
uses transnational instead of multinational to describe a firm doing business in more than one country.

Business people
define a transnational as a company formed by a merger of two firms of approximately the same size that are from two different countries
Unilever (Dutch-English) Dunlop-Pirelli (English-Italian)

International Business

is a business whose activities are carried out across national borders.

includes international trade and foreign manufacturing also includes a growing service industry in areas such as

transportation, tourism, advertising, construction, retailing, wholesaling, and mass communication.


Foreign Business
domestic operations within a foreign country

A Multidomestic Company
has multicountry affiliates, each of which formulates its own business strategy based on perceived market differences.

A Global Company
attempts to standardize and integrate operations worldwide in all functional areas.

International Company
describes both global and multidomestic companies

Global Company- By Whose Definition?

Have a worldwide presence in its market Allen-Edmonds produces all shoes in Port Washington, Wisconsin ships to over 33 nations Standardize operations worldwide in one or more functional areas P&G has operations in more than 70 countries and sells essentially the same products in over 140 countries Integrate operations worldwide Multicultural multinationals respond to local markets, produce products worldwide, exploit knowledge and technology on a global basis


History of International Business

Phoenician and Greek merchants sent abroad before time of Christ 1600s British East India Company established branches in Asia 1700s American colonial traders begin operations FDI prior to Civil War by Colt Fire Arms and Ford 1800s Singer Sewing Machine first foreign production 1914 at least 37 American companies producing overseas


Economic Globalization
is the international integration of goods, technology, labor, and capital. refers to the implementation of global strategies which link and coordinate a firms international activities on a worldwide basis. definition continues to broaden to include
political, social, environmental, historical, geographical, and cultural implications


Globalization Forces
There are five major kinds of drivers that are leading international firms to the globalization of their operations. Political Technological Market Cost Competitive


Globalization Forces

There is a trend toward the unification and socialization of the global community. Preferential trading agreements

NAFTA European Union


Globalization Forces

Advancements in computers and communication technology are permitting an increased flow of ideas and information across borders.

The Internet and network computing enables small companies to compete globally. Business to business commerce is experiencing significant savings by using the Internet for business exchanges.

Web is used to find suppliers Web is used to process purchase orders


Globalization Forces


As companies globalize, they also become global customers. Companies follow customers abroad Saturation of the home market Customer tastes and lifestyles are converging


Globalization Forces


Economies of scale to reduce unit cost are always a

management goal.

Globalizing product lines can reduce development, production, and inventory costs can help achieve economies of scale.

Companies can also locate production in countries

where production costs are lower.


Globalization Forces

Competition continues to increase in intensity.

Newly industrialized and developing countries

Companies are defending their home markets from competitors by entering the competitors home markets to distract them.


Explosive Growth
Foreign Direct Investment
One commonly used measure of growth
Refers to direct investment into equipment, structures, and organizations in a foreign country sufficient to obtain management control
World stock of FDI rose from $519 billion in 1980 to $6.6 trillion in 2001.

Explosive Growth

to the transportation of any domestic good or service to a destination outside the home country or region The level of world merchandise exports more than tripled from 1980 to 2002. The level of service exports worldwide more than quadrupled in the same period.

Number of International Companies

In 2002, the United Nations estimated there were

over 63,800 companies with a total of over 866,000

foreign affiliates accounting for two-thirds of world trade.

Foreign affiliates sales were $17.7 trillion in 2002. Growth due in part to liberalization of government policies toward foreign investment


2002 Top International Firms

Ranking Nation or Firm 1. United States 2. Japan 3. Germany 4. United Kingdom 5. France 6. China 7. Italy 8. Canada 9. Mexico 10. Spain

Total Sales for 2002 ($billion)

$10,207.0 4,323.9 1,876.3 1,510.8 1,362.1 1,234.2 1,100.7 702.0 597.0 296.5


The Globalization Debate


Globalization Concerns

Free trade advances economic development

produces uneven results across nations and people

Reduces poverty, improves education, health and life expectancy

Increases gap between rich and poor

has negative effects on labor and labor standards

Expanded trade creates more and better jobs

Jobs migrate to developing nations

Must manage the costs and transition of workers


contributes to decline in environment and health conditions

Forces in the Environment


The sum of all forces surrounding and influencing the life and development of the firm. Forces can be classified as External forces Management can exert influence but cannot control Internal forces Management must administer and adapt


External Environmental Forces

Competitive Kind, number, location Distributive For goods and services Economic GNP, labor cost Socioeconomic Characteristics of population Financial Interest rates, inflation, taxes


Legal Laws governing business Physical Topography, climate Political Form of government Sociocultural Attitudes, beliefs Labor Skills, attitudes Technological Equipment, skills

Internal Environmental Forces

Factors of production

Capital, raw material, and people

Activities of the organization Personnel, finance, production, and marketing

Domestic Environment

Composed of all the uncontrollable forces

originating in the home country that surrounds and influences the life and development of the firm
Managers May

most familiar

affect foreign operations


Foreign Environment
Operates differently than the domestic environment for the following reasons

Different force values

Changes difficult to assess

Particularly political and legal forces

Forces interrelated


International Environment
The International Environment is

the interaction between the domestic environmental forces and the foreign environmental forces.
the interaction between the foreign environmental forces of two countries when an affiliate in one country does business with customers in another. Decision making is more complex


International Business Model

Figure 1.2 here

International business transactions take place across national borders and may involve three environments.

Foreign International


United States Commercial Service

The U.S. Commercial Service offers four ways to grow your international sales: world-class market research trade events that promote your product or service to qualified buyers introductions to qualified buyers and distributors counseling through every step of the export process

The Language of Trade (Examples)

AD VALOREM EQUIVALENT The duty collected under a specific tariff or a compound tariff expressed as a percentage of the value of the imported item. Since a specific tariff is calculated on the basis of units (of volume or weight), rather than value, and since prices can change over time, the ad valorem equivalent could differ when calculated for different time periods. ubs

AGREEMENT ON RULES OF ORIGIN A WTO agreement addressing the rules that determine the country of origin of an imported product. Rules of origin play an important role in international trade due to the fact that the application of duties and other restrictions on entry often depends on the deemed source of the imports. The agreement provides for harmonization in the practices of WTO members in determining the country of origin of products.

Top Five Global Companies*

Europe Asia

BP Royal Dutch/Shell Group Daimler Chrysler Total Allianz

Toyota Motor Nippon Telegraph and Telephone Hitachi Honda Motor Sony

*According to Fortune 500

Ecommerce Trademark and Patent Services

Trademarks Trademark eBusiness Search File Assign Ownership Search Assignments Status File TTAB Documents Search & View TTAB Proceedings

Patents Patent Electronic Business Center Electronic Filing (EFS) Status Information (PAIR) Assign Ownership Search Assignments Patent Searches Sequence Searches (biotech) Software