International business is defined as all business activities, including the creation and transfer of resources, goods, services, know-how, — skills, and information, which transcend/cros
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INTERNATIONAL BUSINESS
Chapter 1:
Int'l Business ro
PART 1: INTERNATIONAL BUSINESS
Learning Objectives:
1-1 Understand what is business & international business 1-2 Compare domestic business to int'l business 1-3 Describe stages of int'l business
1-4 Understand the external & internal environment in int’! business
1-5 Explain advantages of int'l business 1.6 Understand the risks of int'l business
enough customers to whom its output can be sold on a consistent basis in order to make a profit
¢ Businesses can be privately owned, not for profit or state- owned
Source: Business Dictionary.com
1.1 What is Business & Int'l Business? ,
What is International Business?
International business is defined as all business activities, including the creation and transfer of resources, goods, services, know-how, — skills, and information, which transcend/cross national boundaries
° The resources may be raw materials, energy, technological Know-how and _ patents, capital, and organizational skills
¢ Goods include manufactured parts, sub-assemblies, and assemblies
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© McGraw Hill LLC
© McGraw Hill LLC
1.1 What is Business & Int'l Business? ,
What is International Business? (cont)
¢ Services may include accounting, financial, legal, consulting, import and export, health care, and transportation
°° Know-how may include’ product and_ process technological innovations, copyrights, trademarks, and brands
¢ Skills may include organizational and managerial skills ¢ Information includes databases as well as information
Source: Don B and Wendell M 1999
© McGraw Hill LLC
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1.2 Differences between Domestic & Int’l
Business (cont)
> Definition of Domestic Business:
v The business transaction that occurs within the geographical limits of the country is known as domestic business It is a business entity whose commercial activities are performed within a nation Alternately known as internal business or sometimes as home trade
v The producer and customers of the firm both reside in the country In a domestic trade, the buyer and seller belong to the same country and so the trade agreement is based on the practices, laws and customs that are followed in the country
v There are many privileges which a domestic business enjoys like low transaction cost, less period between production and sale of goods, low transportation cost, encourages small-scale enterprises, etc
1.2 Differences between Domestic & Int’l
Business (cont)
> Definition of International Business:
v International Business is one whose manufacturing and trade occur beyond the borders of the home country All the economic activities indulged in cross border transactions comes under international or investment, logistics, etc., in which two or more countries are involved
v The company conducting international business is known as a multinational or transnational company These companies enjoy a large customer base from different countries, and it does not have to depend on a single country for resources
v Further, the intemational business expands the trade and investment amongst countries
1.2 Differences between Domestic & Int’!
Business (cont.)
foot notes) approach (see foot notes)
national markets, customers international markets, customers
entire globe Operating style can be spread to the entire globe
limited to the domestic
country
It analyses and scan the relevant international environment Environment It analyses and scan the
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1.2 Differences between Domestic & Int’l
Business (cont)
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1.3 Stages of Internationalization
> Stage 1 — Domestic Company: Domestic Company limits its
operations, mission and vision to the national political boundaries
customers etc These companies analyze the national environment of the country, formulate the strategies to exploit the opportunities offered by the environment
¥ Stage 2 — International Company: These companies select
the strategy of locating the branch in the foreign market and extend the same domestic operations into foreign markets These companies
internalization process of most of the global companies starts with this stage of two processes Many of the companies follow this strategy due to limited resources and also to leam from the foreign market gradually before becoming a global company without much risk
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1.3 Stages of Internationalization (cont)
> Stage 3 — : This stage of multinational
company is also referred as multidomestic company formulates different strategies for different market, thus the orientation shift from
offices/branches/ subsidiaries of a MNC work like a domestic company in each country where they operate with distinct policies and strategies suitable to that country concerned
> Stage 4 - Global company is the one which
has either produces in home country or in a single country and focuses on marketing these products globally and focuses on marketing these products domestically
> Stage 5 - : Transnational company
produces, market, invests and operate across the world It is an integrated global enterprise which links global resources with global market at profits There is no such pure transnational corporation
1.3 Stages of Internationalization (cont) Key terms of Int’] Business
country affiliates each of which formulates its own business strategies based on perceived market differences
v : An organization that attempts to standardized and integrate operations worldwide ¡in all functional areas
v INTERNATIONAL COMPANY: Either a global or a multi
domestic company
y¥ ENVIRONMENT as used here is the sum of all forces
surrounding and influencing the life and development of the
firm The forces themselves can be classified as external or internal
Economic Competition
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Source: Intro to Int'l Business, 1st Ed., 2027
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1.4 Internal & External Environment in Int’!
Business (cont)
¥ Internal Environment is factors within the control of company and are referred to both tangible and intangible factors of organizatic~
Source: Intro to int'l Business, 18 Ed., 2021
1.5 Advantages of Int'l Business
1 To achieve higher rate of profits: * Expanding the production capacities beyond the demand of
the domestic country * Severe competition in the home country * Limited home market
2 Political stability vs political instability: * Availability of technology and competent * Human resource
* High cost of transportation * Nearness to raw materials * Availability of quality human resources at low cost * Liberalization and globalization
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1.5 Advantages of Int’l Business (Cont,
3 To increase market share:
* To achieve higher rate of economic development * Tariffs and import quotas
4 High living standards: * Increased socio-economic welfare ¢ Wider market
* Reduced effects of business cycles * Reduced risks Large-scale economies 5 Potential untapped markets:
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1.5 Advantages of Int’l Business (Cont,
5 Potential untapped markets: + Provides the opportunity for and challenge to domestic
business * Division of labour and specialization * Economic growth of the world * Optimum and proper utilization of world resources * Cultural transformation
* Knitting the world into a closely interactive traditional village
impact of globalization 1-5 Understand how the process of globalization is creating
opportunities and challenges for management practice
2.1 What Is Globalization? e Globalization is the process of
among people, companies, and governments worldwide => Globalization is the connection of different parts of the world
e Globalization results in the expansion of international
cultural, economic, and political activities
e Globalization refers to the shift toward a more integrated
and interdependent world economy Globalization has several facets, including
v the globalization of markets and ¥ the globalization of production
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2.1 What Is Globalization? The Globalization of Markets
The merging of historically distinct and separate national markets into one huge global marketplace
* Falling barriers to cross-border trade and investment Benefits small and large companies
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2.1 What Is Globalization? (cont)
The Globalization of Production
Sourcing goods to take advantage of differences in cost and quality of factors of production
« Factors of production include labor, energy, land, capital Early outsourcing was confined to manufacturing * Modern communications technology has advanced
outsourcing today for service activities
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2.1 What Is Globalization? (cont,
The Globalization of Production continued
Robert Reich suggests “global products.” Impediments prevent optimal dispersion of activities: * Formal and informal barriers to trade
* Barriers to foreign direct investment * Transportation costs
* Political and economic risk * Challenge of coordinating globally dispersed supply chain
2.2 The Emergence of Global Institutions |
Institutions needed to help manage, regulate, and police global marketplace
* General Agreement on Tariffs and Trade (GATT) + World Trade Organization (WTO)
* International Monetary Fund (IMF) + World Bank
* United Nations (UN)
World Trade Organization (WTO)
* Polices the world trading system * Ensures nation-states adhere to the rules * Facilitates multinational agreements among members * As of 2021,164 nations that account for 98 percent of
world trade were WTO members
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2.2 The Emergence of Global Institutions
(cont)
International Monetary Fund (IMF)
Established to maintain order in the international monetary system
e Often seen as the lender of last resort
e In return for loans, requires nation-states to adopt specific economic policies aimed at returning their economies to stability and growth
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2.2 The Emergence of Global Institutions
(cont)
United Nations (UN)
v¥ Promotes peace through international cooperation and collective security
¥ 193 member countries v UN Charter has four basic purposes:
e Maintain international peace and security
e Develop friendly relations among nations
e Cooperate in solving international problems and in promoting respect for human rights
e Be a center for harmonizing the actions of nations
* Represents 90 percent of global GDP and 80 percent of international global trade
2.3 Drivers of Globalization
1 Market Drivers: (a) Per capita income converging among industrialized nations (b) Convergence of lifestyles and tastes
(c) Organizations beginning to behave as global consumers (d) Increasing travel create global consumers
(e) Growth of global and regional channels (f) Establishment of world brands (g) Push to develop global advertising
2 Cost Drivers:
2.3 Drivers of Globalization (cont)
2 Cost Drivers: (a) Continuing push for economies of scale (b) Accelerating technological innovation (c) Advances in transportation (d) Emergence of newly industrialized countries with productive
capability and low labour costs (e) Increasing cost of product development relative to market
life 3 Government Drivers:
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2.3 Drivers of Globalization (cont)
3 Government Drivers: (a) Reduction of tariff barriers (b) Reduction of non-tariff barriers (c) Creation of blocs
(d) Decline in role of governments as producers and consumers (e) Privatization in previously state-dominated economies (f) Shift to open market economies from closed communist
systems in eastern Europe 4 Competitive Drivers:
2.3 Drivers of Globalization (cont)
4 Competitive Drivers: (a) Continuing increases in the level of world trade (b) Increased ownership of corporations by foreign acquirers (c) Rise of new competitors’ intent upon becoming global
competitors (d) Growth of global networks making countries
interdependent in particular industries (e) More companies becoming globally centered rather than
nationally centered (f) Increased formation of global strategic alliances
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2.3 Drivers of Globalization (cont)
5 Other Drivers: (a) Revolution in information and communication (b) Globalization of financial markets (c) Improvements in business travel
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2.3 Drivers of Globalization_Updated Inf
Declining Trade and Investment Barriers 1920s to 1930s: Many barriers to international trade and foreign direct investment
* International trade: when a firm exports goods or services to consumers in another country
* Foreign direct investment (FDI): when a firm invests resources in business activities outside its home country GATT lowered barriers
« Uruguay Round extended GATT and established WTO
2.3 Drivers of Globalization_Updated Inf
Declining Trade and Investment Barriers continued Between 1960 and 2020, the value of the world economy increased 9 times, while the value of international goods increased 19.7 times (see Figure 1.1)
¥ Trade in goods and services and the value of foreign direct investment have all been growing faster than world output * More firms dispersing
different locations around the globe production process to * Economies of the world’s nation-states are becoming more
intertwined * World has become significantly wealthier in the
past two decades
2.3 Drivers of Globalization _Updated Inf
Role of Technological Change ¥ Communications
* Development of the microprocessor single most important innovation since World War II
* Moore’s law predicts that the power of microprocessor technology doubles and its cost of production falls in half every 18 months
v The internet * More than half of the world’s population uses the internet * Global e-commerce sales close to $4 trillion
* The internet acts as an equalizer
2.3 Drivers of Globalization _Updated Inf
Role of Technological Change continued ¥ Transportation technology
* Commercial jets, super freighters, and containerization have all “shrunk the globe.”
¥ Implications for the globalization of production:
* Locating production in geographically separate locations has become more economical
¥ Implications for the globalization of markets: * Cultural distance has been reduced and has brought some
convergence of consumer tastes and preferences
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* China and BRIC countries growing more rapidly *« Developing nations may account for more than 60 percent
of world economic activity by 2030
e Desire to disperse production activities to optimal locations and to build a direct presence in major foreign markets
e Outward stock of foreign direct investment (FDI): the total cumulative value of foreign investments by firms domiciled in nations outside of that nation’s borders
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Non-U.S multinationals + In 2003, 38.8 percent of the world’s 2,000 largest
multinationals were U.S firms By 2019, 28.8 percent of the top 2,000 global firms were U.S multinationals, a drop of 201 firms
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The rise of mini-multinationals
e Growth in the number of medium- and small-sized businesses
e Internet is lowering barriers that smaller firms faced in international trade
* Signs of growing unrest and commitment to market-based economic systems cannot be assumed
« Risks of doing business in these countries are high China moving to industrial superpower
In Latin America debt and inflation are down, more private investors, expanding economies
economic policies by countries that had opposed them
e Globalization is not inevitable: Y Countries may pull back ¥ Risks are high
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2.5 The Globalization Debate (cont)
> Globalization, Jobs, and Income
Critics of globalization argue: Falling trade barriers allow firms to move manufacturing activities to countries where wage rates are much lower
* Destroy manufacturing jobs in wealthy advanced economies
e Services also being outsourced: * Contributing to higher unemployment and lower living
standards in their home nations
2.5 The Globalization Debate (cont)
> Globalization, Jobs, and Income continued
Supporters argue: * Benefits outweigh the costs * Free trade will result in countries specializing in the
production of goods and services that they can produce most efficiently, while importing goods and services that they cannot produce as efficiently
* Asa result, the whole economy is better off * Companies can reduce their cost structure, and consumers
benefit