International Business

by
Daniels and Radebaugh

Chapter 1
International Business:
An Overview
© 2001 Prentice Hall 1-1
Objectives
To define internal business (IB) and describe how it
differs from domestic business
To explain why companies engage in IB and why its
growth has accelerated
To introduce different modes a company can use to
accomplish its global objectives
To illustrate the role social science disciplines play in
understanding the environment of IB
To provide an overview of the primary patterns for
companies’ international expansion
To describe the major countervailing forces that affect IB

© 2001 Prentice Hall 1-2

Introduction to International Business (IB)
IB—all commercial transactions between two or more countries
• Involves modes of business that differ from those at the
domestic level
• Foreign conditions diversity company’s external
environment
Why Companies Engage in IB
Expand sales—greater purchasing power in the world as a whole
Acquire resources—products, services, components
• also, foreign capital, technologies, information
Diversify sources of sales and supplies—takes advantage of business
cycle differences among countries
Minimize competitive risk—prevent competitor from gaining
advantages

© 2001 Prentice Hall 1-3

 International Business: Operations and Influences
OPERATIONS
EXTERNAL INFLUENCES
OBJECTIVES
PHYSICAL AND • Sales expansion
SOCIETAL FACTORS • Resource acquisition
• Political policies and • Diversification
legal practices • Competitive risk
• Cultural factors minimization
• Economic forces
• Geographical influences STRATEGY

COMPETITIVE MEANS
FACTORS
•Competitive product strategy. Overlaying
Modes Functions Alternatives
• Importing and exporting • Marketing • Choice of
•Company resources and • Tourism and transportation • Production countries
• Licensing and franchising • Accounting • Organization
Experience. • Turnkey operations • Finance and control
• Management contracts • Human mechanisms
Competition in each market • Direct and portfolio resources
investment

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Reasons for Growth of IB : Factors in increased globalization
Expansion of technology—transportation and communication are quicker and
less costly
Liberalization of cross-border movements
• Government barriers reduced because:
– desire for better access to greater variety of goods and services
– domestic producers forced to be more competitive
– lowered trade barriers to their own exports
Development of supporting services by business and governments to:
• Ease the flow of goods and services sold abroad
• Reduce risks of IB
Increase in global competition—firms have become more global to maintain
competitiveness.
Growing consumer pressure
Changing political situation

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 Why companies Engage in International Business

Expanding Sales
Consumer interest in product and services.
Company Expansion in International Market
Acquiring Resources
Producers and distributor seek out products, services.
Competitive advantage.
Minimizing risk
Operating in countries with different business cycle can minimize swings in sales
and
profit.
Counter advantage gained
foreign operations viewed as risky
International commitments evolve gradually

© 2001 Prentice Hall 1-6

 Means of Carrying Out International Operations
OPERATIONS
EXTERNAL INFLUENCES
OBJECTIVES

PHYSICAL AND
SOCIETAL FACTORS
STRATEGY

MEANS
COMPETITIVE Overlaying
FACTOR Modes Functions Alternatives
• Importing and exporting • Marketing • Choice of
• Tourism and transportation • Production countries
• Licensing and franchising • Accounting • Organization
• Turnkey operations • Finance and control
• Management contracts • Human mechanisms
• Direct and portfolio resources
investment

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Modes of IB
Merchandise exports and imports—most common international economic
transaction, especially for smaller companies
• Major source of international revenue and expenditures for most
companies
Service exports and imports—nonproduct international earnings
• Tourism and transportation
• Service Performance: Performance of services for a fee
– turnkey operations
– management contracts
• Assets use: Use of assets by others—licensing agreements
– royalties
– Franchising—franchisor:
» allows franchisee to use trademark
» provides components, technology, services

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Modes of IB (cont.)
Investments—ownership of foreign property in exchange for financial return
• Foreign direct investment—investor gains a controlling interest in
foreign company
– joint venture
– mixed venture
• Portfolio investment—noncontrolling interest
International Companies—terminology
Strategic alliance—collaborative arrangement of critical importance to the
competitive viability of one or more partners
Multinational enterprise (MNE)—company with global approach to foreign
markets and production
Globally integrated company—integrates operations located in different
countries
Multidomestic company—foreign-country operations act fairly independently
Transnational Company

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Why International Business differ from domestic business
Physical and Societal Influences on International Business
EXTERNAL INFLUENCES
OPERATIONS
PHYSICAL AND
SOCIETAL FACTORS
• Political policies and OBJECTIVES
legal practices
• Cultural factors
• Economic forces
• Geographical influences
STRATEGY

COMPETITIVE
FACTOR

MEANS

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External Influences on IB
Physical and societal factors—must understand
• Politics that affect whether and how IB occurs
• Domestic and international law determines what managers can do in IB
• Economics
• Geography—determine location and availability of world’s resources
Competitive factors/ Environment
• Varies by industry, company, and country
– strategies differ across companies
» e.g., importance of controlling labor costs
» e.g., influence of local and international competitors
– size of market differs across countries

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Competitive Environment and International Business

EXTERNAL INFLUENCES OPERATIONS

PHYSICAL AND
SOCIETAL FACTORS OBJECTIVES

COMPETITIVE
FACTORS
• Competitive strategy for STRATEGY
products.

•Company resources and

experience in host country.

•Competitor faced in each MEANS

market

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Evolution of Strategy in International Process
Risk Patterns of expansion
• Passive to active pursuit of IB opportunities
– initially wait for foreign opportunity
• External to internal handling of IB
– rely on intermediaries at first
• Limited to extensive modes of operations
– begin with importing or exporting operation
• Few to many foreign locations
• Similar to dissimilar business environments
Leapfrogging of expansion—new companies begin with international focus
• Possible because of founder’s experience and technological advances
that help define foreign markets
Differentiation strategy.
Focus strategy : target market

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 The Usual Pattern of Internationalism

Internal versus
Impetus for
HIGH external handling of
international A
foreign operations
business B
Active search MEDIUM Company handles
for opportunities
its own foreign
operations
Passive LOW Other firms
response to handle external
proposals Domestic contracts
Business Limited foreign
Moderately production and
Quite Limited
similar multiple functions
similar foreign Mode of
E Very One functions, operations
Degree of Extensive C
dissimilar usually
similarity Several production
export/
between abroad with
import
foreign and FDI and all
Many
domestic functions
countries D Number of foreign countries in
which a firm does business

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Countervailing Forces—complicate decision making
Global standards—export suited to many countries
– results in economies of scale
– based on global strategy
Nationally responsive practices—adjust product or service to unique local
conditions
– multidomestic approach advisable
Country versus company competitiveness
• Companies compete by seeking maximum efficiency on a global scale
• Countries compete with each other to attain economic, political, and
social goals
– no consensus on measures of goal attainment
• Relationship unclear between country and company performance
– high-value activities—produce high profits or performed by well-
paid employees

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Countervailing Forces (cont.)
Sovereignty—freedom from external control
• Countries will cede in order to:
– gain reciprocal advantages
» bilateral or multilateral commercial treaties or agreements
– attack problems that cannot be solved by a single country
» problem is too big or widespread
» problem results from conditions that spill over from another
country
– deal with areas of concern that lie outside the territory of all
countries (noncoastal areas of the ocean, outer space, Antarctica)
» technologically advanced countries believe that companies
should reap benefits from exploitation
» other countries want to share the spoils

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