CHAPTER 1 Introduction: What is International Business?

1.1 Describe the key concepts in international business.

1.2 Understand how international business differs from domestic business.
1.3 Identify major participants in international business.
1.4 Describe why firms internationalize.

1.1 Describe the key concepts in international business.

• International business: Performance of trade and investment activities by firms across national borders.
Because it emphasizes crossing national boundaries, we also refer to international business as cross-border
business. Firms organize, source, manufacture, market, and conduct other value-adding activities on an
international scale. They seek foreign customers and engage in collaborative relationships with foreign
business partners. Although international business is performed mainly by individual firms, governments and
international agencies also conduct international business activities. Firms and nations exchange many
physical and intellectual assets, including products, services, capital, technology, know-how, and labor.

• Globalization of markets: Ongoing economic integration and growing interdependency of countries

worldwide. Globalization is a macro-trend of intense economic interconnectedness among the nations of the
world. A parallel trend is the ongoing internationalization of countless firms and dramatic growth in the
volume and variety of cross-border transactions in goods, services, and capital flows. Internationalization
refers to the tendency of companies to deepen their international business activities systematically. It has led
to widespread diffusion of products, technology, and knowledge 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.

• 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. It does not entail active management or control over these assets. The foreign
investor has a relatively short-term interest in the ownership of these assets

• Foreign direct investment (FDI). An internationalization strategy in which the firm establishes a physical
presence abroad through acquisition of productive assets such as land, plant, equipment, capital, and
technology. It is a foreign-market entry strategy that gives investors partial or full ownership of a productive
enterprise typically dedicated to manufacturing, marketing, or management activities. Investing such
resources abroad is generally for the long term and involves extensive planning.

1.2 Understand how international business differs from domestic business.

• 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.
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.

• 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”.

• 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.

Ethical Connections. In the fashion industry, hundreds of factory workers die annually from dangerous working
conditions. In the production of faded denim jeans, thousands of garment workers develop deadly lung diseases from
constant exposure to crystalline silica used to sandblast jeans to give them the worn, vintage look. Illegal in Europe
and the United States, such production methods are still widely used in low-income countries, from where the jeans
are then distributed to affluent consumers worldwide.

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.
Examples

• The U.S. imposes tariffs on imports of sugar and other agricultural products.
• Doing business in Russia often requires paying bribes to government officials.
• Venezuela’s government has interfered much with the operations of foreign firms.
• Argentina has suffered high inflation and other economic turmoil.

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.
Examples

• The Japanese yen has fluctuated a lot since 2000.

• The U.S. has relatively high corporate income taxes.
• Brazil and Turkey have experienced very high inflation.

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.

Example

In domestic, business, a company might terminate a poorly performing distributor simply with advance notice. In
foreign markets, however, terminating business partners can be costly due to regulations that protect local firms.
Marketing inferior or harmful products, falling short of customer expectations, or failing to provide adequate customer
service can also damage the firm’s reputation and profitability. Furthermore, commercial risk is often affected by
currency risk because fluctuating exchange rates can affect various types of business deals.

The Four Risks of IB: Conclusion

• Always present but manageable.

• Managers need to understand, anticipate, and take proactive action to reduce their effects.
• Some risks are extremely challenging.
Example

• The global financial crisis generated many commercial, currency, and country risks, affecting banks and other
firms worldwide. This led to steep declines in national stock markets and normal business activity.

1.3 Identify major participants in international business.

Supply side

Focal firm. The initiator of an international business transaction, which conceives, designs, and produces offerings
intended for consumption by customers worldwide. Focal firms are primarily MNEs and SMEs.

• 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., Caterpillar,
Samsung, Unilever, Vodafone, Disney).

• 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 S M E that undertakes substantial international business at or near
its founding.

Distribution channel intermediary. A specialist firm that provides various logistics and marketing services for focal
firms as part of international supply chains, both in the home country and abroad.

Facilitator. A firm or an individual with special expertise in banking, legal advice, customs clearance, or related support
services that assists focal firms in the performance of international business transactions. Freight forwarder A
specialized logistics service provider that arranges international shipping on behalf of exporting firms.

Governments, or the public sector, are also active in international business as suppliers, buyers, and regulators. State-
owned enterprises account for a substantial portion of eco nomic value added in many countries, even rapidly
liberalizing emerging markets such as Russia, China, and Brazil. Governments in advanced economies such as France,
Australia, and Sweden have significant ownership of companies in telecommunications, banking, and natural
resources. The recent global financial crisis led governments to step up their involvement in business, especially as
regulators.

Demand side

Customers consist of:

• Individual consumers and households.

• Retailers—businesses that purchase finished goods for the purpose of resale.

• Organizational buyers—businesses, institutions, and governments that purchase goods and services as inputs to a
production process or as supplies needed to run a business or organization. Governments and nonprofit organizations
such as CARE (www.care.org) and UNICEF (www.unicef.org) also often constitute important customers around the
world.

1.4 Describe why firms internationalize.

• Seek opportunities for growth through market diversification. E.g., Harley-Davidson, IKEA, H&M.
• 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. E.g., Apple sources parts and components from the best suppliers worldwide.

• 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.

• Confront international competitors more effectively or thwart the growth of competition in the home market.
Chinese appliance maker Haier established operations in the United States, partly to gain competitive
knowledge about Whirlpool, its chief U S rivals.

• Invest in a potentially rewarding relationship with a foreign partner. French computer firm Groupe Bull
partnered with Toshiba in Japan to gain insights for developing information technology.

Why you should study international business

• It enhances a firm’s competitive positioning in the global market, facilitates development of the global
economy and of the interconnectedness among nations, and contributes to national economic well-being.
• From a career standpoint, learning about international business will provide you with a competitive edge and
enhance your ability to thrive in the job market. Firms have various opportunities for ethical corporate
citizenship abroad.