MCS 267

INTRODUCTION TO INTERNATIONAL BUSINESS

INTRODUCTION AND OVERVIEW TO INTERNATIONAL BUSINESS

Lecturer
Kwame Ohene Djan, PhD
kohenedjan@gmail.com
Learning Objectives

 Describe the key concepts of international business.

 Identify major participants in international business.

 Describe why firms internationalize?

 Appreciate why you should study international

business?
 Introduction
Over the past three decades a fundamental shift has been occurring in
the world economy. We have been moving away from a world in
which national economies were relatively self-contained entities.
ISOLATED FROM EACH OTHER BY OBSTACLES SUCH AS
 Distance
 Time zones
 Language
 National differences
 Government regulation
 Culture
 Business systems
 INTRODUCTION
 Due to advances in transportation and telecommunications
technology material culture, barriers to cross-border trade
and investment are declining.

 We are moving toward a world in which national economies

are merging into an interdependent and integrated global
economic system.

 E.g.In today’s interdependent global economy, an American

might drive to work in a car designed in Germany that was
assembled in Mexico by Ford from components made from
Korean steel and Malaysian rubber.
The Nature of International Business
• All value-adding activities-including sourcing,
manufacturing, and marketing can be performed in
international locations.
• International trade can involve products, services,
capital, technology, know-how, and labor.
• Firms internationalize through various entry strategies,
such as exporting and foreign direct investment.
 Key Concepts in International Business
 International business: Performance of trade and investment
activities by firms across national borders.
 Globalization of markets: Ongoing economic integration and
growing interdependency of countries worldwide.
 International trade: 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. Boeing and
Airbus export billions in commercial aircraft every year.
Key Concepts in International Business
 Importing or global sourcing: Procurement of products or
services from suppliers located abroad for consumption in the
home country or a third country. Toyota imports many parts from
China when it manufactures cars in Japan.

 International investment: Transfer of assets to another country or

the acquisition of assets in that country. Also known as “foreign
direct investment” (FDI), we will focus on this type of investment.

 International portfolio investment: Passive ownership of foreign

securities such as stocks and bonds, in order to generate financial
returns.
Dimensions of International Business
The ‘Flows’ in International Business
Top 25 Countries in International Merchandise Trade
What is globalization?
 Globalization refers to the shift toward a more
integrated and interdependent world economy.

 Globalization has several facets including:

 Market globalization
 Production globalization:
 Service globalization
 Globalization of markets
 The globalization of markets refers to the merging of historically
distinct and separate national markets into one huge global
marketplace.
 Declining barriers to cross-border globalization of markets trade
have made it easier to sell internationally.
 Tastes and preferences of consumers in different nations are
beginning to converge on some global norm, thereby helping to
create a global market.
 E.g. Consumer products Coca-Cola soft drink, McDonald’s
hamburgers and KFC etc.
 In many global markets, the same firms frequently confront each
other as competitors in nation after nation. Coca-Cola’s rivalry with
Pepsi-Cola while Ford competes with Toyota in the global
marketplace.
 Globalization of Production
 The globalization of production refers to the sourcing of
goods and services from locations around the globe to take
advantage of national differences in the cost and quality of
factors of production (e.g. Labor, energy, land, and capital).

 This enables companies to lower their overall cost structure

or improve the quality or functionality of their product
offering, thereby allowing them to compete more effectively.
 E.g.Boeing 777 and 787 have 65% of its components parts
coming from different countries. Example Japan, Singapore
Service Globalization
 Globalization of services. Banking, insurance, hospitality,
telecommunication, retailing, universities and other service
industries are rapidly internationalizing.

 Firms outsource business processes and other services in

the value chain to vendors overseas.

A new trend, many people go abroad to take advantage of

low-cost services
 Drivers of Globalization
There are basically two main drivers of globalization;

 Decline in barriers to the free flow of goods, services, and

capital.

 Technological change e.g. dramatic developments in

communication, information processing, and transportation
technologies
The Emergence of Global Institutions

As markets globalize and an increasing proportion of business activity

transcends national borders, institutions are needed

 To help manage, regulate, and police the global marketplace

 To promote the establishment of multinational treaties to govern the

global business system.
Examples of Global Institutions

 Agreement on Tariffs and Trade (GATT)

 The World Trade Organization ( WTO)
 International Monetary Fund (IMF)
 World Bank (WB)
 the United Nations (UN).

 All these institutions were created by voluntary agreement between

individual nation-states, and their functions are enshrined in
international treaties.
 Societal Consequences of Globalization
 Loss of National Sovereignty. MNE activities can interfere with
governments’ ability to control their own economies and social-political
systems. Some firms are bigger than the economies of many nations (e.g.,
Ghana’s GDP USD 226 billion; Walmart USD 236.49 billion; Shell USD
404.3 billion).
 Offshoring and the Flight of Jobs. Jobs are lost as firms shift production of
goods and services abroad, in order to cut costs and obtain other
advantages. Firms benefit, communities and industries are disrupted.
 Effect on the Poor. In poor countries, while globalization usually creates
jobs and raises wages, it also tends to disrupt local job markets. M N E s
may pay low wages, and many exploit workers or employ child labor.
Is the Shift Toward a More Integrated and
Interdependent Global Economy a Good Thing?

 Most economists, politicians, and business leaders seem to think

so.
 They argue that the reduction in barriers to international trade and
investment are engines driving the global economy towards
greater prosperity. They believe that globalization stimulates

 Economic growth
 Raises the incomes of consumers,
 Creation of jobs
 Antiglobalization
Other protesters also argue that globalization leads to:
 Job losses in industries under attack from foreign competitors.
 Downward pressure on the wage rates of unskilled workers.
 Environmental degradation.
 Cultural imperialism of global media and multinational
enterprises.

 Both theory and evidence suggest that many of these fears are
exaggerated; both politicians and business people need to do
more to counter these fears.
International and Domestic Business: How They Differ
 International business….
 is conducted across national borders.
 uses distinctive business methods.
 is in contact with countries that differ in terms of culture,
language, political system, legal system, economic
situation, infrastructure, and other factors.
 Stated differently, when they venture abroad, firms
encounter four major types of risk.
Major Risks of International Business
 Cross- Cultural Risk
 Cultural Differences. Risk arising from differences in
language, lifestyle, attitudes, customs, and religion, where a
cultural miscommunication jeopardizes a culturally-valued
mindset or behavior.
 Negotiation Patterns. Negotiations are required in many types
of business transactions. E.g., where Mexicans are friendly and
emphasize social relations, Americans are assertive and get
down to business quickly.
Cross- Cultural Risk
 Ethical Practices. Standards of right and wrong vary
considerably around the world. For example, bribery is
relatively accepted in some countries in Africa, but is
generally unacceptable in Sweden.
 Decision-Making Styles. Managers make decisions
continually on the operations and future direction of the
firm. For example, Japanese take considerable time to make
important decisions. Canadians tend to be decisive, and
“shoot from the hip”.
 Country Risk (Political Risk)

 Government intervention, protectionism, and barriers to trade

and investment.
 Bureaucracy, red tape, administrative delays, corruption.
 Lack of legal safeguards for intellectual property rights.
 Legislation unfavorable to foreign firms.
 Economic failures and mismanagement.
 Social and political unrest and instability.
 Currency Risk (Financial Risk)
 Currency exposure. General risk of unfavorable exchange rate
fluctuations.
 Asset valuation. Risk that exchange rate fluctuations will
adversely affect the value of the firm’s assets and liabilities.
 Foreign taxation. Income, sales, and other taxes vary widely
worldwide, with implications for company performance and
profitability.
 Inflation. High inflation, common to many countries, complicates
business planning, and the pricing of inputs and finished goods.
 Commercial Risk
 Weak partner
 Operational problems
 Timing of entry
 Competitive intensity
 Poor execution of strategy

 General commercial risks such as these lead to sub-optimal

formulation and implementation of the firm’s international value-
chain activities.
 Who Participates in International Business?
 Multinational enterprise (MNE): A large company with substantial
resources that performs various business activities through a network of
subsidiaries and affiliates located in multiple countries (e.g., Nestle, Samsung,
Unilever, Vodafone, KFC).
 Small and medium-sized enterprise (SME): Typically, companies with 500
or fewer employees, comprising over 90% of all firms in most countries.
SMEs increasingly engage in international business.
 Born global firm: A young, entrepreneurial SME that undertakes substantial
international business at or near its founding (Mostly IT firms).
 Non-governmental organizations: Many of these non-profit organizations
conduct cross-border activities. They pursue special causes and serve as
advocates for social issues, education, politics, and research.
 Why do Firms Internationalize?
Seek opportunities for growth through market diversification. E.g., Harley-
Davidson, IKEA,
Earn higher margins and profits. Often, foreign markets are more profitable.
Gain new ideas about products, services, and business methods. E.g., G M
refined its knowledge for making small, fuel-efficient cars in Europe.
Serve key customers that have relocated abroad. E.g., When Toyota
launched its operations in Britain, many of its suppliers followed suit.
Be closer to supply sources, benefit from global sourcing advantages, or gain
flexibility in the sourcing of products.
Gain access to lower-cost or better-value factors of production. E.g., Sony
does much manufacturing in China.
 Why do Firms Internationalize
 Gain access to lower-cost or better-value factors of production. E.g., Sony
does much manufacturing in China.
 Develop economies of scale in sourcing, production, marketing, and R & D.
E.g., Airbus lowers its overall costs by sourcing, manufacturing, and
selling aircraft worldwide.
 Invest in a potentially rewarding relationship with a foreign partner. French
computer firm Group Bull partnered with Toshiba in Japan to gain insights
for developing information technology.
 Why Study IB?
 Facilitator of the global economy and interconnectedness. IB brings
nations closer together.
 Contributor to national economic well-being. IB fuels economic growth
and rising living standards.
 A competitive advantage for the firm. IB provides companies with many
benefits, leading to profitability and competitive advantages.

 A competitive advantage for you. Working internationally offers a range

of enlightening experiences, new knowledge, and other benefits that
enhance career.
 An opportunity to support ethics, sustainability and corporate citizenship.
Firms must be ethical and socially responsible in their dealings because IB
affects numerous constituents, often in unintended ways.