3

C
H
A
P
T
E
R
Introduction
to
International
Topics:
Business
 Global,
Multinational and
Transnational
Company
 Evolution of
International
Objectives:
Business
 Nature
After ofthis chapter, you should:
studying
 Know how the concept of international business evolved
International
 State the nature of international business
Business
 Describe
Influencesthe influences and goals of international business
and
 Identify
Goals ofthe problems of international business
International
Business
 Problems of

I
International
nternational business is all commercial transactions private and governmental
Business
between two or more countries. Private companies undertake such transactions for profits;
governments may or may not do the same in their transactions. These transactions include
sales, investments and transportation.
Study of international business has become important because (i) It comprises a large
and growing portion of the world’s total business. (ii) All companies are affected by global
events and competition, whether large or small, since most sell output to and secure raw
materials and supplies from foreign countries. Many companies also compete against products
and services that come from outside India.
 The company’s external environment conditions such as physical, societal and
competitive affect the way business functions such as marketing, manufacturing and supply
chain management are carried out. When a company operates internationally, foreign
conditions are added to domestic ones making the external environment more diverse and
complex.

EVOLUTION OF INTERNATIONAL BUSINESS

The analytical framework of international business is build around the activities of

Multinational Enterprises (MNEs) enunciated by the process of internationalisation. The FDI on
the part of an MNE attempts to overcome the obstructions to trade in foreign countries. The
strategies relating to the functional areas, such as production, marketing, finance and price
policies, are adopted by the MNEs in such a manner that an amicable relationship between
home and host nations is created.
Foreign direct investment can be distinguished from the other forms of international business,
such as exporting, licensing, joint ventures and management contracts. Basically, it reacts to the
restrictions in foreign trade, licensing, etc. and its growth at the global level has taken place
mainly due to the imperfections in the world markets and protective trade policies pursued by
different countries for the sake of protecting their economies.
The ways in which the MNEs have provided challenges to the imperfections and
restraints in the world markets from an important part of the conceptual methods underlying
the expanding role of international business.
The fast growth of international business has also been conducive to foster close
international economic relations among different countries of the world. Now, the world
economy is not only interdependent but also inter-linked, and any kind of R&D taking place in
any part of the world has its impact on the entire global economy.
The business across the borders of the countries had been carried on since times immemorial.
But, the business had been limited to the international trade until the recent past. The post-
World War II period witnessed an unexpected expansion of national companies into
international or multinational companies. The post 1990's period has given greater fillip to
international business.
International Trade to International Marketing: Originally, the producers used to export their
products to the nearby countries and gradually extended the exports to far-off countries.
Gradually, the companies extended the operations beyond trade.
International Marketing to International Business: The multinational companies which were
producing the products in their home countries and marketing them in various foreign
countries before 1980s, started locating their plants and other manufacturing facilities in
foreign/host countries. Later, they started producing in one foreign country and marketing in
other foreign countries.
GLOBAL, MULTINATIONAL AND TRANSNATIONAL COMPANY
 Multinational companies have
investment in other countries, but do
not have coordinated product offerings in
each country. More focused on adapting
their products and service to each
individual local market. A Multinational
Corporation (MNC) or Multinational
Enterprise (MNE) is a corporation
enterprise that manages production or
delivers services in more than one country. It can also be referred to as an international
corporation. They play an important role
in globalization.
 Global companies have invested and are
present in many countries. They market
their products through the use of the
same coordinated image/brand in all
markets. Generally one corporate office that
is responsible for global strategy.
Emphasis on volume, cost management and
efficiency.

 Transnational companies are much

more complex organizations. They have
invested in foreign operations, have a
central corporate facility but give
decision-making, R&D and marketing
powers to each individual foreign
market.

Major causes of MNCS Development

1. Corporate structure of organization with its infinite life and legal organization as a
separate entity;
 2. Extensive improvement in communication and transportation which have accelerated
international business;
3. The growth of excess financial resources in industrial countries;
4. The rapid expansion of markets in many countries; and
5. The formation of larger regional markets through common market and free trade
agreements.
Contribution of MNCS

Meshing of market strategies

throughout the free world Ready transfer of technology
economy

Recruitement, training, and

development of local Introduction of new products
management talents

Achievement of economies of
Mobility of production
scale

NATURE OF INTERNATIONAL BUSINESS

International
 International Restrictions Restrictions
In international business, there is a fear of
the restrictions which are imposed by the Benefits to Participating
Market
Countries
government of the different countries. Many Segmentation
country’s governments don’t allow international
businesses in their country. They have trade
blocks, tariff barriers, foreign exchange
restrictions, etc. These things are harmful to Large Scale
international business. Operations

 Benefits to Participating Countries

It gives benefits to the countries which are
participating in the international business. The
richer or developed countries grow their
business to the global level and they get maximum benefits. The developing countries get the
latest technology, foreign capital, employment opportunities, rapid industrial development, etc.

 Large Scale Operations

International business contains a large number of operations at a time because it is conducted
on a large scale globally. Production of the goods at a large scale, they have to fulfill the
demand at a global level. Marketing of the product is also conducted at a large scale to make
them aware of the product. First, they fulfill the domestic demand and then they export the
surplus in the foreign markets.
 Market Segmentation
International business is based on market segmentation on the basis of the geographic
segmentation of the consumers. The market is divided into different groups according to the
demand of the consumers in different countries. It produces goods according to the demand of
the consumers of the different market segmentations.

INFLUENCES AND GOALS OF INTERNATIONAL BUSINESS

Companies engage in international business to:
1. Expand Sales - Companies’ sales Expand Sales Minimize Risk Acquire Resources
are dependent on
a. the consumers’ interest in their
products or service and
b. the consumers’ willingness and ability to buy them. The
number of people and the extent of their purchasing powers are higher for the world as a
whole than for a single country. Hence companies increase the potential market for their sales
by pursuing global markets. Thus, higher sales means higher profits because of economies of
scale. So, increased sales are a major motive for a company’s expansion into international
business.
2. Acquire Resources - Manufacturers and distributors also look for foreign capital,
technologies and information that they can use at home, to reduce their costs. Sometimes, a
company operates abroad to acquire something not readily available in the home country so as
to improve its product quality and differentiate itself from competitors, potentially increasing
market share and profits.
3. Minimise Risk - Companies seek out foreign markets to minimise swings in sales and profits
arising out of business cycle recessions and expansions which occur differently in different
countries.
PROBLEMS OF INTERNATIONAL BUSINESS
What makes international business strategy different from the domestic are the differences in
the marketing environment. The important special problems in international marketing are
given below:
1. Political and Legal Differences - The political and legal environment of foreign markets is
different from that of the domestic. The complexity generally increases as the number
of countries in which a company does business increases. It should also be noted that
the political and legal environment is not the same in all provinces of many home
markets.
2. Cultural Differences - The cultural differences, is one of the most difficult problems in
international marketing. Many domestic markets, however, are also not free from
cultural diversity.
3. Economic Differences - The economic environment may vary from country to country.
4. Differences in the Currency Unit - The currency unit varies from nation to nation. This
may sometimes cause problems of currency convertibility, besides the problems of
exchange rate fluctuations. The monetary system and regulations may also vary.
5. Differences in the Language - An international marketer often encounters problems
arising out of the differences in the language. Even when the same language is used in
different countries, the same words of terms may have different meanings. The
language problem, however, is not something peculiar to the international marketing.
6. Differences in the Marketing Infrastructure - The availability and nature of the marketing
facilities available in different countries may vary widely. For example, an advertising
medium very effective in one market may not be available or may be underdeveloped in
another market.
7. Trade Restrictions - A trade restriction, particularly import controls, is a very important
problem, which an international marketer faces.
8. High Costs of Distance - When the markets are far removed by distance, the transport
cost becomes high and the time required for affecting the delivery tends to become
longer. Distance tends to increase certain other costs also.
INTERNATIONAL BUSINESS ENVIRONMENT
Though society and culture do not appear to be a part of business situations, yet they
are actually key elements in showing how business activities will be conducted, what goods will
be produced, and through what means they will be sold to establishing industrial and
management patterns and determining the success or failure of a local subsidiary or affiliate.

The main elements of culture are:

1. Attitudes and Beliefs: The set of attitudes and beliefs of a culture will influence nearly all
aspects of human behavior, providing guidelines and organization to a society and its
individuals.
In contrast to American individualism, Japanese are group-oriented. Japanese do not like
to be alone or to do things differently from others. They stick together: eating, working,
or traveling in a group. Following others and being part of a group gives them a kind of
care freeness and joy. Why are Japanese group-oriented? The reasons originate from
their geography, history, and culture.

2. Attitudes towards Time: Everywhere in the world people use time to communicate with
each other. In international business, attitudes towards time are displayed in behavior
regarding punctuality, responses to business communication, responses to deadlines,
and the amount of time that is spent waiting in an outer office for an appointment.
An interesting phenomenon related to the Spanish people's attitude toward time is
something that we have come to dub "The Manana Complex" (Manana meaning
'tomorrow' in the Spanish language). "Why do something now when it can be done
tomorrow?" Or "What's the rush? Things will be completed eventually" seems to be the
philosophy and way of life for many Spanish people.
3. Attitude towards Work and Leisure: People’s attitudes towards work and leisure are
indicative of their views towards wealth and material gains. These attitudes affect the
types, qualities and numbers of individuals who pursue entrepreneurial and
management careers as well.
Time spent in the home and with other household members (Kelly, 1997, p.132), and
research has uncovered both the familial and personal importance of leisure in daily life.

4. Attitude towards Achievement: In some cultures, particularly those with high stratified
and hierarchical societies, there is a tendency to avoid personal responsibility and to
work according to precise instructions received from supervisors that are followed by
the latter. In many industrial societies, personal responsibility and the ability to take
risks for potential gain are considered valuable instruments in achieving higher goals.

McCoach and Siegle (2001) compared 122 gifted achievers with 56 gifted
underachievers in 28 different high schools. The results of an analysis suggested that
gifted underachievers differed from achievers on four factors: attitudes toward
teachers, attitudes toward school, goal valuation, and motivation/self-regulation.
5. Attitudes towards Change: The international manager must understand what aspects of
a culture will resist change and how the areas of resistance differ among cultures, how
the process of change takes place in different cultures and how long it will take to
implement change
Perlman and Takacs (1990) argued that there is a big similarity between the stages that
an individual goes through dealing with death described by KublerRoss (1969) and the
 stages they identified that individuals go through when they experience organizational
change. More specifically, they noted that there are many emotional states that a
person can experience during change processes, which are equilibrium, denial, danger,
bargaining, chaos, depression, resignation, openness, readiness and re-emergence.

6. Attitude towards Job: The type of job that is considered most desirable or prestigious
varies greatly according to different cultures. Thus, while medical and legal professions
are considered extremely prestigious in the United States, civil service is considered the
most prestigious occupation in several developing countries including India.
Gardner & Korth (1998) sought to understand if attitudes toward group work varied
according to individual learning style preference. They found that there were a large
number of statistically significant differences; in other words, student attitudes about
group work and preferred instructional methods seemed to vary systematically with
their individual learning style.

Marketing in Cross-cultural Context

Though all people have much in common as human is, there still are many differences in
cultures as we move from nation to nation. Culture is adaptive, and marketing strategies based
on the values of society must also be adaptive. When cultural changes occur, trends develop
and provide marketing opportunities to those who spot the changes before their competitors
do. As culture evolves, marketers may associate product or brand benefits with new values, or
they may have to change the product if that value is \no longer gratifying in society.

Cultural Variations

Cross-cultural influences are norms and

values of consumers in foreign markets that Concern differences in values among
influence strategies of multinational different groups within a country that
organizations marketing their products and distinguish them from society as a whole.
services abroad.

Cross-cultural analysis helps marketers determine to what extent the consumers of two or
more nations are similar or different. The greater the similarity between consumers, the more
feasible it is to use relatively similar strategies in each country. In case the cross-cultural
analysis reveals that there are wide cultural differences, then a highly individualized marketing
strategy may be indicated for each country.

Technological Environment
 1. Internet - A technology with important implications for business in the Internet
sometimes referred to as “the information superhighway.” The Internet is a global web
of more than 25,000 computer networks. It provides a quick, inexpensive means of
global communication (i.e. with strategic alliance partners) and access to information.
GE engineers often use the Internet to communicate with their counterparts when
doing development work for other companies. The Internet provides access to experts
on such topics as chemical engineering and semi-conductor manufacturing, to the
library of Congress, and even to satellite photographs.

2. Modems - Modems are important for connecting personal computers to phone lines
that help gain access to the Internet. The technology in the manufacture of modems has
advanced rapidly. Their speed may only be curtailed by the limits of conventional phone
lines. Encyclopedia Britannica Inc. is using the Internet to revive its business.
The firms now offer a free search engine with sites screened by its editors. As
Encyclopedia Britannica’s actions demonstrate, the Internet can allow a firm to be both
flexible and innovative with its product introductions.
3. High Speed Digital Stream - To obtain technology to deliver a high-speed digital stream
that can be viewed as movies, Web sites or advertising on televisions with its
equipment.
4. Satellite Imaging - Another new technology that is gaining rapid popularity is satellite
imaging. Several aerospace companies have invested up to $1 billion in corporate earth
imaging systems.
Space Imaging, Inc., a joint venture for Lockheed Martin, E-systems, Mitsubishi
Corporation, and Eastman Kodak Company, is a $500 million venture that provides from
an advanced satellite. Many expect this technology to compete in the global information
trade industry and some anticipate that it will create a revolution.

Economic Environment
Perhaps the most important characteristic of the
international market environment is the economic dimension. With
money, all things are possible. Without money, many things are
impossible for the marketer. Luxury products, for example, cannot
be sold to low-income consumers. Hypermarkets for food,
furniture, or durables require a large base of consumers with the ability to
make large purchases of goods and the ability to drive away with those
purchases.
1. Market Allocation
 A market allocation system is one that relies on consumers to allocate resources.
Consumers “write” the economic plan by deciding what will be produced by whom. The role of
the state in a market economy is to promote competition and ensure consumer protection.
The United States, most Western European countries, and Japan – the triad countries that
account for three quarters of gross world product – are predominantly market economy.
2. Command Allocation
In a command allocation system, the state has broad powers to serve the public
interest. These include deciding which products to make and how to make them. Consumers
are free to spend their money on what is available, but state planners make decisions about
what is produced and, therefore, what is available. Because demand exceeds supply, the
elements of the marketing mix are not used as strategic variables.
3. Mixed System
Income and Purchasing Power Parity around the Globe
When a company charts a plan for global market expansion, it often finds that, for most
products, income is the single most valuable economic variable. After all, a market can be
defined as a group of people willing and able to buy a particular product.
Ideally, GNP and other measures of national income converted to U.S. dollars should be
calculated on the basis of purchasing power parities (i.e. what the currency will buy in the
country of issue) or through direct comparisons of actual prices for a given product. This would
provide an actual comparison of the standards of living in the countries of the world.
Did u know? The top 10 nations ranked as per purchasing parity are: (In Order) USA,
China, India, Japan, Germany, Russia, Brazil, UK, France and Italy.
Key Economic Issues that Influence International Business
The key economic issues that influence international business are discussed below:

Income Poverty
Inflation Debt Distribution
Unemployment
1. Inflation
Inflation is the pervasive and sustained rise in the aggregate level of prices measured by an
index of the cost of various goods and services. Inflation results when aggregate demand grows
faster than aggregate supply- essentially, too many people are trying to buy too few goods,
thereby creating demand that pushes prices up faster than incomes grow. Consider the impact
of inflation on the cost of living. Rising prices make it more difficult for consumers to buy
products unless their incomes rise at the same or faster pace. Sometimes it is practically
impossible. Either alone or together, these measures slow or stop economic growth.
2. Unemployment
The unemployment rate is the number of unemployed workers divided by the total
civilian labor force, which includes both the unemployed and those with jobs. In practice,
measuring the number of unemployed workers actually seeking work in various countries is
difficult given the lack of a standard measurement method. Generally, people out of work and
unable to find jobs depress economic growth, create social pressure, and provoke political
uncertainty.
3. Debt
Debt, the sum total of government’s financial obligations, measures the state’s
borrowing from its population, from foreign organizations, from foreign governments, and from
international institutions. More recently, many countries have borrowed from international
lenders to finance their movement to freer markets, a process of economic transition. Many
countries that began with this ambition but that eventually failed then increasingly had to rely
on foreign debt.
4. Income Distribution
GNI or PPP, even weighted by the size of the population, can misestimate the relative
wealth of a nation’s citizens. Uneven income distribution is not a problem of poorer nations.
There is a strong relationship between skewed income distributions and the split between
those who live in urban settings versus those who live in rural areas.
5. Poverty
A related but separate issue concerns poverty- the state of having little or no money,
few or no material possessions, and little or no resources to enjoy a reasonable standard of life.
In many parts of the world, workers and consumers struggle for food, shelter, clothing, and
clean water, health services, to say nothing of safety, security, and education. Failure results in
suffering, malnutrition, mental illness, death epidemics, famine, and war.
 The Balance of Payments
The Balance of Payments (BOP), officially known as the statement of International Transactions,
records a country’s international transactions that take place between companies,
governments, or individuals. Managers use the BOP as a comprehensive indicator of a country’s
economic stability.
Political Environment
In order to appraise the political environment of a country, the knowledge of the form
of government of that country is essential. Basically, the government can be classified into two
categories – parliamentary (open) or absolutist (closed). In the parliamentary form of
government, the citizens are supposed to be consulted from time to time for learning about
their opinions and preferences. In this type of government the policies are thus intended to
reflect the desire of the majority segment of society. Most of the industrialized nations and
democratic countries can be classified as parliamentary.
At the international political level, the governments can be classified in a number of ways.
However, the best way to classify the government is through the political parties.

Classification
of Political
Parties

Multiple
Two party Single party One party
party

 In a two party system, there are mainly two parties that

control the government, turn by turn, which-so-ever in a
majority and the other parties are also allowed to
support any one of the two parties.

 In a multi-party system, there are a large number of

parties, however, none of them are strong enough to gain
control of the government. There have been cases when the
larger parties, in spite of having a thin majority, cannot
control the government because it needs support from other
parties. The government, in this case, can only be
formed through coalition of likeminded parties each one of which would like to protect
its own interest.

 In a single party system, there may be a number of

parties functioning in a country, however, one party has so
much of majority that there is very little opportunity for others
to elect representatives to govern the country.

 In a dominated one party system, the dominant party does

not allow any opposition resulting in no alternative for the
people. In contrast, a single party system does allow some
 opposition parties. The former Soviet Union, Cuba and Libya are good examples of
dominated one party system. Such a system tends to easily transform itself into
dictatorship. Democratic political system is a pre requisite for political stability also.
India, the largest democracy in the world, possesses a sound political infrastructure and
political institutions that have withstood many crises over the years.
Political Risks Defined
Political risk, sometimes called “sovereign risk,” has several elements.
 It is found whenever a government prevents a private sector debtor from repaying its
obligations.
 It occurs when the foreign government is itself a debtor and defaults on its own
obligations due to its own volition.
 Political risk is present when a government repossesses the assets of a private entity
(sometimes referred to as “confiscation,” or “expropriation”).
Other examples of political risks include imposition of new controls (such as trade restrictions,
exchange limitations or monetary controls), and war, revolution or insurrection.

Political Risk Analysis

There are a number of political risks which are to be faced by international marketers. The risks,
which the marketers face from the host government, are:

Confiscation Expropriation Nationalization

The process of a Expropriation differs from It involves

government’s confiscation in that there is government
taking some compensation ownership and it is
though not necessarily just
ownership of a the government that
compensation. More often
property operates the
than not, a company
Indicators of Political Instability
To assess a potential marketing environment, a company should identify and, evaluate the
relevant indicators of political difficulty. Potential sources of political complication include social
unrest, the attitudes of nationals, and the policies of the host government.

Social disorder is caused by such

underlying conditions as economic
hardship, internal dissension and
Social Unrest insurgency, and ideological, religious,
racial, and cultural differences.
Nationals are often concerned with
foreigners’ intentions in regard to
Attitudes of Nationals exploitation and colonialism, and these
concerns are often linked to concerns
over foreign governments’ actions that
may
The be seencan
mood as improper.
change either with time
Policies of the Host or change in leadership, and it can
Government change for either the better or the
worse.

Enrichment
Activity 1 An MNC Story

It was an American movie in 1982 which portrayed the power and exploitation of a very
elegant old man who was president of a multinational corporation. He managed the largest
copper mining corporation in Latin America which employed thousands of local workers in the
region.
The MINC boss was very rich and very powerful. He
associated with the most famous men and with the most
beautiful women. He attended conferences and parties in
various great cities of the world. He had a very young and
extremely beautiful wife. He had a private airplane, together
with a bunch of tough looking security men.
A big problem for the MNC boss cropped up when the
president of the country where his corporation was located
died. The son of the deceased president, a young Harvard graduate of economics, succeeded
his father. He became a dictator and ordered the shooting of all those who opposed him. Being
an economist, he was aware of the exploitations of the copper mining company in his country.
So, he planned to take the company.
The MNC president offered substantial financial rewards to the hero of the story who
was a former Harvard classmate of the dictator. His mission was to convince his former
classmate not to touch the giant mining corporation. The hero, an ordinary bank employee in
the United States refused the job. The following day, the hero was fired from his job in the
bank. The MNC boss was of course responsible for this. He got good connections and influence.
The hero being poor and jobless was forced to accept the mission to Latin America. This was
against his principles because he knew the evils of multinational corporations. When he was
still a student at Harvard, he wrote an article exposing the exploitations of the multinational
corporations, The MNC boss had copy of such article.
The hero, together with the MNC boss and his wife, and security men went to Latin
America. The hero could not convince his friend, the dictator. The former was more interested
in the well-being of his countrymen and the future of his country. He was against American
imperialism in his region and he promised to eliminate it.
The MNC president and his wife stayed at the U.8. Embassy. During the lunch given by
the American ambassador and his wife in honor of his rich visitors, the dictator barged in. It was
only the wife of the MNC boss who had earlier told him to see her at the U.S. Embassy. In that
group, the hero, the security men, and the general of the army who appeared to be more
subservient to the MNC boss, were present. The dictator was offered by the American
ambassador, and he ate informally. While the group was eating, the MNC boss started talking
about his friendship with the father of the dictator, how he used to carry the dictator in his
arms when he was still a child. Then he talked of the good things that his company has done for
the people and for the whole economy. At this point, the dictator answered people were
exploited and his country remained underdeveloped. The MNC boss stood up and exploded his
temper. He shouted that without his company the people would be hungry and that the
economy would collapse. The U.S. ambassador tried to pacify the two men, but the MNC boss
shouted at him and told him to shut up. The U.S. ambassador, together with his wife, was
visibly embarrassed. The MNC boss continued shouting at the young dicta tor, and told him he
would have him killed. The dictator left with only one companion, and he drove his army-type
jeep.
A few minutes later, the MNC boss and his group left the U.S. Embassy and rushed to
the airport. The poor hero nearly missed the car of the MNC boss which was speeding away. On
their way to the airport, the MNC boss ordered his bodyguard to shoot the hero who was sitting
beside him (MNC boss) and his wife, the security man aimed his gun towards the hero. But he
(Security man) fired instead his gun at the MINC boss.
What lessons did you learn from the MNC story? Look for the similar true story of MNC
in the provinces and state the story briefly.

Activity 2 Technological Environment

Compare and contrast the technological environment of the Third World Countries such
as the Philippines from the Highly Developed Countries such as Japan.

Japan Philippines
Essay Writing Rubric