Chapter 1

Introduction to
International
Business
 International Business and
Trade?
 IB – performance of trade and investment
activities by firms across national borders.
The world is moving away from self-contained
national economies toward an
interdependent, integrated global economic
system.

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 International Business and
Trade?
 IT - Exchange of products and services
across national borders; typically through
exporting and importing.
Exporting - Sale of products or services to
customers located abroad, from a base in the
home country or a third country.
Importing - Procurement of products or services
from suppliers located abroad for consumption in
the home country or a third country.

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 Why study Global /
International Business?
 A facilitator of the global economy -
Globalization
 A contributor to national economic well-
being
 A competitive advantage for the firm
 An activity with societal implications

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 Why study Global /
International Business?
 Globalization - the shift toward a more
integrated and interdependent world
economy
The world is moving away from self-contained
national economies toward an
interdependent, integrated global economic
system

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 Reasons for IB?
A Competitive Advantage for the Firm
 Increase sales

 Maximize returns: Foreign markets often

generate returns far superior to those in
domestic markets.
 Maximizing efficiencies: International players
can maximize their efficiencies by securing cost-
effective factor inputs from around the world.
 Resource acquisition: Access to otherwise
unavailable critical resources
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 Reasons for IB?
An Activity with Societal Implications
 As firms increase their international activities, so does
responsibility to society to be a good corporate citizen.
 Large corporations like Wal-Mart, Unilever, and Sony have
annual revenues larger than the GDPs of many of the nations
they operate.
 The internationalization of thousands of firms negatively impacts
the natural environment, e.g. pollution
 Large banks and international investment brokers have disturbed
the economies of nations with aggressive currency trading or by
manipulating stock markets.
 Some MNEs ignore human rights and basic labor standards by
establishing factories in countries that pay low wages with
substandard working conditions, e.g. Nike in Asia.
 Building factories abroad often leads to job losses at home.
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 Why study Global /
International Business?
Contributor to National Economic Well-Being
 International trade is a critical engine for job
creation. It is estimated that every $1 billion
increase in exports creates more than 20,000 new
jobs.
 International business is both a cause and a result
of increasing national prosperity.
 Prosperity is accompanied by literacy rate gains,
nutrition and health care improvements, with some
tendencies towards freedom and democracy.

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 Why Engage in International
Business?
1. Seek opportunities for growth through market
diversification

2. Earn higher margins and profits

3. Gain new ideas about products, services, and

business methods
4. Better serve customers that have relocated
abroad
5. Be closer to supply sources, benefit from global
sourcing advantages, or gain flexibility in the
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 Why Engage in International
Business?
6. Gain access to lower-cost or better-value
factors of production
7. Develop economies of scale in sourcing,
production, marketing, and R&D
8. Confront international competitors more
effectively or thwart the growth of
competition in the home market
9. Invest in a potentially rewarding
relationships with foreign partners
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 International Operations of
Small Businesses
A company defined (in the U.S.) as having 500 or
fewer employees
 Comprise 90 - 95 % of all firms in most
countries.
 Increasingly more SMEs participate in
international business
 Account for 1/3 of exports from Asia; 1/4 of the
exports from the affluent countries in Europe and
North America
 Contribute more than 50 percent of total national
exports in Italy, South Korea, and China.
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 International Operations of
Small Businesses
 Companies conduct value-adding activities on a
global scale, primarily to organize, source,
manufacture, and market
 All value-adding activities including sourcing,
manufacturing, and marketing, can be performed in
international locations
 The subject of cross-border trade can be products,
services, capital, technology, know-how, and labor
 Firms internationalize via exporting, foreign direct
investment, licensing, franchising, and collaborative
ventures

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 International Operations of
Small Businesses
Born global firm: a young entrepreneurial company
that initiates international business activity very early in
its evolution, moving rapidly into foreign markets.
‘Born Globals’ and SMEs:
 Are often more innovative, adaptable, and have quicker
response times;
 Are better able to serve niche markets;
 Leverage the Internet to do international business;
 Tend to minimize fixed costs and outsource, due to limited
resources;
 Tend to flourish on private knowledge that they cultivate
via their knowledge networks.
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 Difference between Domestic
Trade and International Trade?
 Managing an international business differs from
managing a domestic business because
 countries are different
 the range of problems confronted in an international
business is wider and the problems more complex
than those in a domestic business
 firms have to find ways to work within the limits
imposed by government intervention in the
international trade and investment system
 international transactions involve converting money
into different currencies

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 Types of International
Business?
 Four Major Types of IB 
1) Exporting - Exporting is often the first
choice when manufacturers decide to expand
abroad. Simply stating, exporting means
selling abroad, either directly to target
customers or indirectly by retaining foreign
sales agents or/and distributors.
exporting has minimal impact on the firm’s human
resource management

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 Types of International
Business?
2) Licensing - there is an agreement whereby
a firm, called licensor, grants a foreign firm
the right to use intangible (intellectual)
property for a specific period of time, usually
in return for a money.
Licensing of intellectual property such as patents,
copyrights, manufacturing processes, or trade
names abound across the nations

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 Types of International
Business?
3) Franchising - Franchising is an option in
which a parent company grants another
company/firm the right to do business in a
prescribed manner.
Closely related to licensing is franchising.
Franchising differs from licensing in the sense that it
usually requires the franchisee to follow much stricter
guidelines in running the business than does licensing

However, exporting, licensing and franchising make

companies get them only so far in international
business.

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 Types of International
Business?
 4) International investment - Transfer of assets
to another country or the acquisition of assets in
that country.
4.1) International Portfolio investment (typically
short-term): Passive ownership of foreign securities
such as stocks and bonds, to generate financial
returns.
4.2) Foreign direct investment (FDI) (typically long-
term): An internationalization strategy in which the
firm establishes a physical presence abroad through
acquisition of productive assets such as capital,
technology, labor, land, plant, and equipment.

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 Types of International
Business?
 4) International investment –
4.2) Foreign direct investment
4.2.1) joint ventures - A joint venture is
defined as “the participation of two or more
companies jointly in an enterprise in which each
party contributes assets, owns the entity to some
degree, and shares risk”.
4.2.2) Wholly – owned subsidiaries - In
contrast, a wholly-owned subsidiary is owned 100%
by the foreign firm

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Modes of International
Business?

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Problem Arises in IB

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 Problem Arises in IB

 Cross-cultural risk: a situation or event where

a cultural miscommunication puts some human
value at stake
Differences in language, life styles, attitudes,
customs, and religion where a cultural
miscommunication jeopardizes a culturally valued
mindset or behavior.
Language – critical dimension of culture, a window
to people’s value.
Language differences hinders effective
communication.
Cultural differences may lead to sub finest
business strategies
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 Problem Arises in IB

 Country risk (Political): potentially adverse

effects on company operations and profitability
holes by developments in the political, legal, and
economic environment in a foreign country
 Differences in host country political, legal and
economic regimes may adversely impact firm
profitabilitiy.
 Laws, regulations and other factors such as property
rights, taxation policies, inflation, national debts may
handicaps firm operations and performance.
 Government interventions (such as bureaucratic
procedures) may hinders business transactions and
limits the amount of income.
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 Problem Arises in IB

 Currency risk (Financial): risk of adverse

unexpected fluctuations in exchange rates
 Risk of adverse exchange rate fluctuations, inflation
and other harmful economic conditions create
uncertainty of returns.
 When currencies fluctuate significantly, the value of
firms assets, liabilities and or operating income may
be substantially reduced.

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 Problem Arises in IB

 Commercial risk: firms potential loss or failure

from poorly developed or executed business
strategies, tactics, or procedures
 Less than optimal (best up-to-mark) formulation
and/or implementation of strategies, tactics or
procedures, e.g. partnering selections, market entry
timing, pricing, product features, and promotional
themes.
 Failures in international markets are far more costly
than domestic business blunders.

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 Internationalization: Process,
theories
 Internationalization is the process through
which a firm expands its business outside
the national domestic markets 
1) MNCs – A firm that carries out its value
chains in more than one country. It is generally
headquarted in one home country while it
operates in one or more host countries.
TNCs – A MNC that does not identify itself with
any specific nation, but acquires truly
international features (i.e not country dependent)
and high local responsiveness.

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Internationalization: Process,
theories

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 Internationalization: Process,
theories
 Strategies / Ways of Going Internationalization
1) Importation
2) Exportation
3) FDI
4) Licensing
5) Franchising
6) Joint Venture
7) Manufacturing in Foreign Country
8) Management Contracts
9) Consultancy Services
10) Strategic Partnerships

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 Internationalization: Process,
theories
 Theories about internationalization
Absolute cost advantage – (Adam Smith, 1970s)
 “an exchange of goods will take place only if each
of the two countries can produce one commodity at
an absolutely lower production cost than the other
country”.
– When countries specialise on basis of absolute
advantage in costs, they stand to gain through
international trade, just as a tailor does not make his own
shoes and shoemaker does not stitch his own suit and
both gain by exchanging

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 Internationalization: Process,
theories
 Theories about internationalization
Comparative cost advantage
Gravity model of trade
New Trade Theory

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 Internationalization: Process,
theories
 Theories about internationalization
Comparative cost advantage
Gravity model of trade
New Trade Theory

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