International Business

Meaning of International Business

• International business consists of transaction that are
devised and carried out across national borders
to satisfy the objectives
individuals, companies
of and
organizations.

• The economic system of exchanging good and services,

conducted between individuals and businesses in
multiple countries.

• The specific entities, such as multinational corporations

(MNCs) and international business companies (IBCs),
which engage in business between multiple countries.
 Need for International Business

• Causes the flow of ideas, services and capital across the world.

• Offer consumer new choices.

• Permits the acquisition of a wider variety of products.

• Facilitate the mobility of labor, capital and technology.

• Provide the challenging employment opportunities.

• Reallocate resources makes preferential choices and shifts activities to

global level .
Types of International Business

• Export –Import trade

• Foreign Direct investment

• Licensing

• Franchising

• Management contract
 Franchising
• Franchising refers to the methods of practicing and
using another person's business philosophy. The
franchisor grants the independent operator the right to
distribute its products, techniques, and trademarks for a
percentage of gross monthly sales and a royalty fee.
Various tangibles and intangibles such as national or
international advertising, training, and other support
services are commonly made available by the franchisor.
Agreements typically last from five to thirty years,
with
premature cancellations or terminations of
most contracts bearing serious consequences for
franchisees.
 Businesses for which franchising
works best
Businesses for which franchising is said to work best have
the following characteristics:
• Businesses with a good track record of profitability.
• Businesses built around a unique or unusual concept.
• Businesses with broad geographic appeal.
• Businesses which are relatively easy to operate.
• Businesses which are relatively inexpensive to operate.
• Businesses which are easily duplicated.
 Licensing
• A business arrangement in which one company
gives another company permission to
manufacture its product for a specified payment.

• There are few faster or more profitable ways to

grow your business than by licensing patents,
trademarks, copyrights, designs, and other
intellectual property to others .
• For example, about 90 percent of the
$160 million a year in sales at Calvin Klein
Inc. comes from licensing the designer's
name to makers of undergarments, jeans
and perfume.
 Management contracts
• Agreement between investors or owners
of a project, and a management company
hired for coordinating and overseeing a
contract. It spells out the conditions and
duration of the agreement, and the
method of computing management fees.
• An agreement by which a company will
provide its organizational and
management expertise in the form of
services.
 FDI and
• FDI standsFII
for Foreign Direct Investment,
component
a of a country's national financial
accounts. Foreign direct investment is
investment of foreign assets into domestic
structures, equipment, and organizations. It
does not include foreign investment into the
stock markets. Foreign direct investment is
thought to be more useful to a country than
investments in the equity of its companies
because equity investments are potentially "hot
money" which can leave at the first sign of
trouble, whereas FDI is durable and generally
useful whether things go well or badly.
 FIIs
• The term is used most commonly in PH to
refer to outside companies investing in
the financial markets of Philippines.
International institutional investors must
register with the Securities and Exchange
Board of India to participate in the market.
One of the major market regulations
pertaining to FIIs involves placing limits on
FII ownership in PH companies
 Drivers of International business
• Regional developments helping internationalization:

1)Emergence of NAFTA comprising united states, Canada and Mexico has created a
huge north American market. Movement of goods and services among these
countries is easy as all trade barriers have been removed. The result will be a giant
“American market” that would parallel similar development in Asia and Europe.

2)The most recent changes of GAAT are stimulating increased world trade. Under the
new agreement, tariffs would be reduced world wide by 38%and in some cases,
eliminated completely.

3)Japan, of late has invested relatively more in Asia than in any part of the world.
Japanese corporations want to take advantage of the underdeveloped but growing
Asian market.

4)Export potential is vast in central and eastern Europe, Russia which are converting
themselves into market economies.

5)There is also recent economic progress among less developed economies. For
example India Globalization and liberalization approach toward economy

6) The new economy, a characteristic feature of the present century, itself demands
trading across the globe.
International Investment and Trade
• Developed countries are active players in
international investment. Approx. 80% of the
global investment emanate from rich countries.
For example FDI in the US stands at over $600
billion, while the US FDI is almost $ 800 billion.
• The developed and developing countries are the
major recipient of FDI
Other reasons of Internationalization
• There is a lot of money in the overseas market. The MNCs from the triad-
the US, Europe and Japan – have huge assets than a quarter of these
assets are found in foreign market. GE of the US is one of the top MNC with
assets of over $ 300 billion in 1997 and nearly a third of its assets were
found in overseas countries. The Dutch /UK firm shell has huge assets and
three fifth of these are located overseas.

• It is being realized that the domestic markets are no longer adequate and
rich. Japan flooded American with automobiles and electronics because
domestic market was not large enough to absorb whatever was produced.

• Companies often set up overseas plant to reduce high transportation cost.

The higher the ratio of unit cost to the selling price per unit, the more
significant the transportation factor becomes.

• The motivation to go global in high tech industries is slightly different. They

spend lot on research and development for new products. If domestic sales
and export do not generate sufficient cash flow, the company naturally might
look to overseas manufacturing plants and sales branches to generate
higher sales and better cash flow.
• Firms go global to access resources that are unavailable or more
expensive at home ( Japan largest paper company Nippon
Seishi, needs to do more than import of wood pulp. It owns huge
forests and processing facilities in Australia, Canada and US.

• Labor market also attract companies into international business.

One way companies gain competitive advantage is by locating
production facilities in low cost countries.

• Firms go global to avoid protectionist barrier imposed by local

government. Government erect various forms of barriers to entry in
their domestic markets by foreign firms

• Companies enter foreign markets because competitors have

already done it.

• Govt. throughout the world offer a variety of incentives to attract

MNCs
 International Vs. Domestic Business
Basis International business Domestic business

Payment Mostly in foreign currency In domestic currency

Laws and Subject to international laws and

Subject to national rules and regulations
rules regulations

Custom Different custom and traditions

Same custom & Traditions
&
Traditions

Legal Have to face different legal It is almost the same.

and economic and tax rate system
economic
system
Approach Have to follow geocentric approach Have to follow ethnocentric approach
Organization that engage in IB
vary considerably in size and
the extent