FUNDAMENTALS OF

INTERNATIONAL BUSINESS
CHAPTER 1
OVERVIEW OF INTERNATIONAL BUSINESS
 II.
INTERNATIONAL
BUSINESS

I.
GLOBALIZATION
I. GLOBALIZATION
1.1. WHAT IS GLOBALIZATION?

§ The world is moving away from self-contained national economies

toward an interdependent, integrated global economic system
§ Globalization refers to the shift toward a more integrated and
interdependent world economy
1.2. TYPES OF GLOBALIZATION

v What Is The Globalization Of Markets?

§ Historically distinct and separate national markets are merging
§ It no longer makes sense to talk about the “Singapore market” or
the “American market”
§ Instead, there is the “global market”
o Falling trade barriers make it easier to sell globally
o Consumers’ tastes and preferences are converging on some global norm
o Firms promote the trend by offering the same basic products worldwide
v What Is The Globalization Of Production?

§ Firms source goods and services from locations around the globe to
capitalize on national differences in the cost and quality of factors of
production like land, labor, and capital
§ Companies can
o Lower their overall cost structure
o Improve the quality or functionality of their product offering
1.3. WHAT IS DRIVING GLOBALIZATION?

§ The decline in barriers to the free flow of goods, services, and

capital that has occurred since the end of World War II
o Since 1950, average tariffs have fallen significantly
o Countries have opened their markets to FDI
§ Technological change
o Microprocessors and telecommunications
o The Internet and World Wide Web
o Transportation technology
v What Does Globalization Mean For Firms?
§ Lower barriers to trade and investment mean firms can
o view the world, rather than a single country, as their market
o base production in the optimal location for that activity
§ Technological change means
o lower transportation costs - firms can disperse production to economical, geographically
separate locations
o lower information processing and communication costs - firms can create and manage
globally dispersed production systems
o low-cost global communications networks - help create an electronic global marketplace
o low-cost transportation - help create global markets
o global communication networks and global media - create a worldwide culture, and a
global market for consumer products
v What Does Globalization Mean For Firms? (cont.)

OPPORTUNITIES CHALLENGES

• Increase sales and profits • There are differences between countries

• Access to external resources • The problems that arise in international

business are much more complex
• Reducing the risk of competition
• Regulated by other countries' governments
• Dispersing consumption markets and
• Problems arise regarding the use of different
sources of supply
currency systems
v The Changing Demographics Of The Global Economy

§ There has been a drastic change in the demographics of the world economy in
the last 30 years
§ Four trends are important:
o the Changing World Output and World Trade Picture
o the Changing Foreign Direct Investment Picture
o the Changing Nature of the Multinational Enterprise
o the Changing World Order

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v How Has World Output And World Trade Changed?
§ In 1960, the United States accounted for over 40% of world economic activity
§ By 2008, the United States accounted for just over 20% of world economic
activity
§ A similar trend occurred in other developed countries
§ The share of world output accounted for by developing nations is rising and is
expected to account for more than 60% of world economic activity by 2020

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v How Has World Output And World Trade Changed? (cont.)
The Changing Demographics of World GDP and Trade

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v How Has Foreign Direct Investment Changed Over Time?
• In the 1960s, U.S. firms accounted for about two-thirds of worldwide FDI flows
• Today, the United States accounts for less than one-fifth of worldwide FDI
flows
• Other developed countries have followed a similar pattern
• In contrast, the share of FDI accounted for by developing countries has risen
• Developing countries, especially China, have also become popular destinations
for FDI

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v How Has Foreign Direct Investment Changed Over Time? (cont.)

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v How Has Foreign Direct Investment Changed Over Time? (cont.)

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v What Is A Multinational Enterprise??
• A multinational enterprise (MNE) is any business that has productive activities
in two or more countries
• Since the 1960s, there has been a rise in non-U.S. multinationals, and a growth of
mini-multinationals

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v The Changing World Order
§ Many former Communist nations in Europe and Asia are now committed to
democratic politics and free market economies
o so, there are new opportunities for international businesses
o but, there are signs of growing unrest in some countries like Russia
§ China and Latin America are also moving toward greater free market reforms
o between 1983 and 2011, FDI in China increased from less than $2 billion to
$100 billion annually
o emergence of new companies increases global competition

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v How Will The Global Economy Of The 21st Century Look?
§ The world is moving toward a more global economic system…
§ But globalization is not inevitable
o there are signs of a retreat from liberal economic ideology in Russia
§ Globalization brings risks
o the financial crisis that swept through South East Asia in the late 1990s
o the recent financial crisis that started in the U.S. in 2008, and moved around
the world

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Is An Interdependent Global Economy A Good Thing?
§ Supporters believe that increased trade and cross-border investment
mean
o lower prices for goods and services
o greater economic growth
o higher consumer income, and more jobs
§ Critics worry that globalization will cause
o job losses
o environmental degradation
o the cultural imperialism of global media and MNEs
§ Anti-globalization protesters now regularly show up at most major
meetings of global institutions

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How Does Globalization Affect Jobs And Income?
§ Critics argue that falling barriers to trade are destroying manufacturing
jobs in advanced countries
§ Supporters contend that the benefits of this trend outweigh the costs
o countries will specialize in what they do most efficiently and trade for other
goods—and all countries will benefit

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How Does Globalization Affect Labor Policies And The
Environment?
§ Critics argue that firms avoid costly efforts to adhere to labor and
environmental regulations by moving production to countries where such
regulations do not exist, or are not enforced
§ Supporters claim that tougher environmental and labor standards are
associated with economic progress
o as countries get richer from free trade, they implement tougher
environmental and labor regulations

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How Does Globalization Affect National Sovereignty?
§ Is today’s interdependent global economy shifting economic power away
from national governments toward supranational organizations like the
WTO, the EU, and the UN?
§ Critics argue that unelected bureaucrats have the power to impose
policies on the democratically elected governments of nation-states
§ Supporters claim that the power of these organizations is limited to what
nation-states agree to grant
o the power of the organizations lies in their ability to get countries to agree
to follow certain actions

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How Is Globalization Affecting The World’s Poor?
§ Is the gap between rich nations and poor nations is getting wider?
§ Critics believe that if globalization was beneficial there should not be a
divergence between rich and poor nations
§ Supporters claim that the best way for the poor nations to improve their
situation is to
o reduce barriers to trade and investment
o implement economic policies based on free market economies
o receive debt forgiveness for debts incurred under totalitarian regimes

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How Does The Global Marketplace Affect Managers?
§ Managing an international business differs from managing a domestic
business because
o countries are different
o the range of problems confronted in an international business is wider and
the problems more complex than those in a domestic business
o firms have to find ways to work within the limits imposed by government
intervention in the international trade and investment system
o international transactions involve converting money into different currencies

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1.4. WHY DO WE NEED GLOBAL INSTITUTIONS?
§ Institutions
o Help manage, regulate, and police the global marketplace
o Promote the establishment of multinational treaties to govern the global
business system
ü the General Agreement on Tariffs and Trade (GATT)
For example: ü the World Trade Organization (WTO)
ü the International Monetary Fund (IMF)
ü the World Bank
ü the United Nations (UN)
v What Do Global Institutions Do?

§ The World Trade Organization (like its predecessor GATT)

o polices the world trading system
o makes sure that nation-states adhere to the rules laid down in trade treaties
o promotes lower barriers to trade and investment
v What Do Global Institutions Do?

§ The International Monetary Fund (1944) maintains order in the

international monetary system
§ The World Bank (1944) promotes economic development
§ The United Nations (1945)
o maintains international peace and security
o develops friendly relations among nations
o cooperates in solving international problems and in promoting respect for
human rights
o is a center for harmonizing the actions of nations
II. INTERNATIONAL
BUSINESS
2.1. WHAT IS INTERNATIONAL BUSINESS?
§ International business is all commercial transactions - private and
governmental - between two or more countries.
§ International business refers to profit-related activities conducted
across national boundaries.

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 International Business vs. Domestics Business
Criteria Domestics Business International Business
Meaning Business transactions are Business transactions with one or
conducted within the country’s many countries all over the world
boundary
Active area Domestics Global
Quality standard Quite low High
Currency Fewer Variety of currency systems
Capital investment Less Huge
Drawback Few Many
Customers’ characteristics Homogeneous Not homogeneous
Business research Easy to conduct Hard to conduct
Shift of production factors Free Restricted

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 Types of International Business

International Trade Contract Investment

• Export Ÿ Lisencing • Foreign Direct

Ÿ Exclusive agent
• Import Investment
Ÿ The order
• Outsourcing Ÿ Build and transfer • Foreign Indirect
• Re-export Ÿ Product division Investment
• Transshipment Ÿ Management contracts

• On-spot export
2.2.. WHY DO COMPANIES GO INTERNATIONAL?
§ Minimize competitive risk
§ Acquire resources
§ Expand sales
§ Diversify sources of sales and supplies.

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2.3. The Participants in International Business

Enterprise

Employee Consumer

Finance
Government
Institutions
 Table - Comparison between 500 global companies’s revenue and countries’ GDP

Country Company GDP 2020 (million $) Revenue 2020 (million $)

21. Poland 596,624
Walmart (US) 559,000
22. Sweden 541,220
23. Belgium 521,861
24. Thailand 501,643
25. Australia 433,258
26. Nigeria 432,293
27. Ireland 425,888
28. Israel 407,100
29. Argentina 389,288
Amazon (US) 386,000
30. Egypt 365,252
31. Norway 362,522
 Table - Comparison between 500 global companies’s revenue and countries’ GDP
Country Company GDP 2020 ($ million) Revenue 2020 ($ million)
32. Philippines 361,489
33. United Arab Emirates 358,868
34. Denmark 356,084
35. HongKong 346,585
36. Singapore 339,998
37. Malaysia 337,006
39. South Africa 335,442
40. Bangladesh 323,056
Apple (US) 294,000
PetroChina 281,000
41. Colombia 271,437
42. Vietnam 271,158
43. Finland 269,751
 Table - Revenue of the 10 largest global companies ($ billion)

Rank Company Country Area Revenue 2019 Revenue 2020

1 Walmart US Consumer goods 524 559

2 Amazon US Consumer goods 296 386

3 Apple US IT 268 294

4 PetroChina China Energy 364 281

5 Sinopec China Energy 369 271

6 CVS Health US Medicine 257 269

7 UnitedHealth Group US Medical 246 263

8 Volkswagen Group Germany Car industry 275 254

9 Toyota Motor Japan Car industry 281 249

10 Berkshire Hathaway US Finance 255 246

Review Question
The shift toward a more integrated and interdependent world
economy is referred to as
a) economic integration
b) economic interdependency
c) globalization
d) internationalization

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Review Question

The merging of historically distinct and separate national markets

into one huge global marketplace is known as
a) global market facilitation
b) cross-border trade
c) supranational market integration
d) the globalization of markets

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Review Question

Firms that are involved in international business tend to be

a) large
b) small
c) medium-sized
d) large, small, and medium-sized

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Review Question

Which is not a factor of production?

a) trade
b) land
c) capital
d) energy

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Review Question
The sourcing of good and services from around the world to take
advantage of national differences in the cost and quality of factors
of production is called
a) economies of scale
b) the globalization of production
c) global integration
d) global sourcing

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Review Question

Which organization is responsible for policing the world trading

system?
a) the International Monetary Fund
b) the United Nations
c) the World Trade Organization
d) the World Bank

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Review Question
What is the single most important innovation to the globalization
of markets and production?
a) advances in transportation technology
b) the development of the microprocessor
c) advances in communication
d) the Internet

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Review Question
Which of these is not a concern of anti-globalization protesters?
a) globalization raises consumer income
b) globalization contributes to environmental degradation
c) globalization is causing a loss of manufacturing jobs in developing
countries
d) globalization implies a loss of national sovereignty

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