Unit I: Introduction to International

Business
Contents
• Concept
• Significance
• Impact on International Business
• International Business Contrasted with domestic business
• Complexities of International Business
• Internationalization Stages and Orientation
• Modes of Entry into International Business
 Globalization
Globalization is the word used to describe the growing interdependence of the world’s economies,
cultures, and populations, brought about by cross-border trade in goods and services, technology, and
flows of investment, people, and information. Countries have built economic partnerships to facilitate
these movements over many centuries.

The drivers of globalization can be classified into.

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:
(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:
(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:
(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

5. Other Drivers:
(a) Revolution in information and communication
(b) Globalization of financial markets
(c) Improvements in business travel
International Business

“International business includes any type of business

activity that crosses national borders”

There are two Phases of the evolution of the term International Business:

1. International Trade to International Marketing

2. International Marketing to International Business
Impact of International Business
• Growth of Overseas Markets
• Sales and Profit
• Diversification
• Inflation and Price Moderation
• Employment
• Standards of Living
Patterns of Internationalization
• Passive to Active Expansion – Path A

• External to Internal Handling of Operations – Path B

• Deepening Mode of Commitment – Path C

• Geographic Diversification – Path D

• Leapfrogging of Expansion – Path E

Stages of internationalization
• Stage 1 – Domestic Company: Domestic Company limits its operations, mission and
vision to the national political boundaries.

• 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 remain ethnocentric or domestic country oriented.

• Stage 3 – Multinational Company: This stage of multinational company is also

referred as multidomestic company formulates different strategies for different market,
thus the orientation shift from ethnocentric to polycentric.

• Stage 4 – Global Company: 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: 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.
 Differences between Domestic and
International Business
• 1. Distance: The distance involved in export of goods in external trade
is generally greater than on the domestic trade.

• 2. Language differences: There are differences in the languages of

the nations of the world. The overseas traders should be very careful
in preparing the publicity material in the languages of the trading
country.

• 3. Cultural difference: A producer should have full knowledge about

the market of his products. For exporting goods particularly a thorough
research is undertaken.

• 4. Technical difference: In the national market the difference in the

technical specification for goods and their requirements is not wide.

• 5. Tariff barriers: In the national trade, there are no custom duties,

exchange restrictions, fixed quotas or other tariff barriers.
•
• 6. Documentations: In the home trade there are few documents
involved in the exchange of goods.
• 7. Payments: In the internal trade, the goods are exchanged in the
currency unit of the country. In case of foreign trade currencies differ
widely throughout the world and those also vary in value.

• 8. Transport and insurance cost: The transport and insurance

costs are less in case of domestic trade. For the exports, on the
other hand the cost of transport is high and the insurance is
complicated
 International Business Approaches
• Ethnocentric Approach: The excessive production more than the demand for the
product, either due to competition or due to change in customer preferences push the
company to exports the excessive production to the foreign countries. The company
export the same product designed for domestic market to foreign market under this
approach. Thus, maintenance of domestic approach towards international business is
called ethnocentric approach.

• Polycentric Approach: The company establishes a foreign subsidiary company and

decentralized all the operations and delegates decision making and policy making
authority to its executives. The executives of the subsidiary formulate the policies and
strategies, design the product based on the host country’s environment and the
preferences of the local customer. Thus this approach mostly focuses on the
conditions of the host country in policy formulation, strategy implementation and
operations.

• Regiocentric Approach: The foreign subsidiary considers the regional environmental

for formulating policies and strategies. It market more or less the same product
designed under polycentric approach in other countries of the region, but with different
market strategies.

• Geocentric Approach: Under this approach, the entire world is just like a single
country for the company. They select the employees from the entire globe and operate
with the number of subsidiaries. Each subsidiary functions like an independent and
autonomous company in formulating policies, strategies, product design, human
resource policies, operations etc.
 Modes of Foreign Expansion
• Exporting
Exporting is the marketing and direct sale of domestically-produced goods in another
country.
Exporting commonly requires coordination among four players:
1. Exporter, 2. Importer, 3. Transport provider, and 4. Government
Advantages:
1. It minimizes both risk and capital requirements and it is conservative way to test the
international waters.
2. By manufacturing the product in a centralized location and exporting to other national
markets, the firm may realize substantial economies from its global sales volume. This is
how Sony came to dominate the global TV market
Disadvantages:
1. Exporting from the firm’s home base may not be appropriate if there are lower-cost
locations for manufacturing the product abroad (i.e. if the firm can realize location
economies by moving production elsewhere.)
2. High transport costs can make exporting uneconomical, particularly for bulk products.
One way of going around is to manufacture bulk products regionally.
3. Tariff barriers can make exporting uneconomical. Similarly the threat of tariff barriers by
the host-country government can make it very risky.
4. Exporting through local agent may not be good proposition since foreign agents often
carry the products of competing firms and so have divided loyalties.
• Licensing
Licensing makes sense when a firm with valuable technical know-how or a unique patented product has
neither the internal organizational capability nor the resources to enter the foreign markets. Licensing
essentially permits a company in the target country to use the property of the licensor. Such property usually
is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange
for the rights to use the intangible property and possibly for technical assistance.

Advantages:

1. Licensing has the advantage of avoiding the risks of committing resources to country markets that are
unfamiliar, present considerable economic uncertainty or are politically volatile.

2. Licensing is often used when a firm wishes to participate in a foreign market but is prohibited from doing
so by barriers to investment.

3. 3. Licensing is frequently used when a firm possesses some intangible property that might have business
applications, but it does not want to develop those applications itself.

Disadvantages:

1. The big disadvantage of licensing is the risk of providing valuable technological know-how to foreign
companies and thereby loosing some degree of control over its use; monitoring licenses and safeguarding
the company’s proprietary know-how can prove quite difficult in some cases.

2. Competing in a global market may require a firm to coordinate strategic moves across countries by using
profits earned in one country to support competitive attacks in another.
• Franchising
Franchising is basically a specialized form of licensing in which the franchiser not only sells
intangible property (normally a trademark) to the franchisee, but also insists that the
franchisee agree to abide by strict rules as how it does business. The franchiser will also
often assist the franchisee to run the business on an ongoing basis.

The franchisor provided the following services to the franchisee: 1. Trade marks, 2.
Operating system, 3. Product reputations, 4. Continuous support systems like advertising,
employee training, reservation services, quality assurance programmes etc.

Advantages
Franchising has much the same advantages as licensing. The franchisee bears most of the
costs and risks of establishing foreign locations; the franchiser has to expend only the
resource to recruit, train, and support franchisees. Thus using a franchising strategy, a
service firm can build a global presence quickly and at a relatively low cost and risk, as
McDonald’s has.

Disadvantages
The big problem a franchiser faces is maintaining quality control; foreign franchisees do not
always exhibit strong commitment to consistency and standardization, perhaps because the
local culture does not stress or put much value on the same kinds of quality concerns.
• Turnkey Projects

In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including
the training of operating personnel. At completion of the contract, the foreign client is handled the “key” to a
plant that is ready for full operation-hence the term turnkey.
This is a means of exporting process technology to other countries. Turnkey projects are most common in
the chemical, pharmaceutical, petroleum refining, and metal refining industries, all of which use complex,
expensive production technologies.
Advantages:
1. Turnkey projects are a way of earning great economic returns from the asset. The strategy is particularly
useful where FDI is limited by host-government regulations.
2. A turnkey strategy can also be less risky than conventional FDI. In a country with unstable political and
economic environments, a longer-term investment might expose the firm to unacceptable political and/or
economic risks (e.g., the risk of nationalization or of economic collapse).

Disadvantages:
.1.The firm that enters into a turnkey deal will have no long-term interest in the foreign country. This can be a
disadvantage if that country subsequently proves to be a major market for the output of the process that has
been exported.

2. The firm that enters into a turnkey project with a foreign enterprise may inadvertently create a competitor.

3. If the firm’s process technology is a source of competitive advantage, then selling this technology through
a turnkey project is also selling competitive advantage to potential and/or actual competitors.
 Strategic Alliance
• A strategic alliance is a formal relationship between two or more parties to pursue a set of
agreed upon goals or to meet a critical business need while remaining independent
organizations.
• Strategic alliances are agreements between companies (partners) to reach objectives of a
common interest.
• Alliances are among the various options, which companies can use to achieve their goals;
they are based on co-operation between companies.
• Strategic alliances take many forms, including contractual arrangements (such as license
agreements, marketing agreements, and development agreements), minority equity
investments, and joint ventures that are operated as separate legal entities (such as
corporations, limited liability companies, or partnerships).
• Strategic alliances share common features such as:
1. Defined scope and strategic objectives;
2. Interdependent contractual arrangements within the defined scope and to
achieve the strategic goals;
3. Specifically defined responsibilities and commitments for each party;
4. Independence of the parties outside of the defined scope of the alliance;
5. A fixed time period in which to achieve the strategic goals.
• Example: Contractual strategic alliances are license agreements, marketing, promotion, and distribution
agreements, development agreements, and service agreements. The most complex form of strategic
alliance is a joint venture. A joint venture involves creating a separate legal entity (generally a
corporation, limited liability company, or partnership) through which the business of the alliance is
conducted.
 Goals of Strategic Alliances

• Setting New Global Standards

• Confronting Competition
• Overcoming Protectionist Barriers
• Dividing Risks
• Economy of Scale
Benefits of Strategic Alliances:
1. Access to distribution channels,
2. Access to technology, expertise or intellectual property,
3. As a means to raise capital,
4. New products for your customers,
5. Lower R&D costs,
6. Economies of scale, and
7. Raise brand awareness.

Costs/Risks of Strategic Alliances

1. Incoherent goals, with one business not benefiting greatly from the agreement;
2. Insufficient trust, with each partner company trying to get the better deal;
3. Conflicts over how the partnership works;
4. Potential to reduce future opportunities through being unable to enter into
agreements with your partner’s competitors;
5. Lack of commitment to the partnership; and
6. Risk of sharing too much knowledge and the partner company becoming a
competitor.
 Joint Ventures
• A joint venture entails establishing a firm that is jointly owned by two or more otherwise independent
firms.
• Fuji-Xerox for example, was set up as a joint venture between Xerox and Fuji Photo. Establishing a
joint venture with a foreign firm has long been popular mode for entering a new market. The most
typical joint venture is a 50/50 venture, in which there are two parties, each of which holds a 50
percent ownership stake and contributes a team of mangers to share operating control.
• Reasons for Joint Venture Formation
1. Internal Reasons:
(a) Build on company’s strengths,
(b) Spreading costs and risks,
(c) Improving access to financial resources,
(d) Economies of scale and advantages of size,
(e) Access to new technologies and customers, and
(f) Access to innovative managerial practices.
2. External Reasons:
(a) Influencing structural evolution of the industry,
(b) Pre-empting competition,
(c) Defensive response to blurring industry boundaries,
(d) Creation of stronger competitive units,
(e) Speed to market, and
(f) Improved agility.
3. Strategic Reasons:
(a) Synergies, (b) Transfer of technology/skills, and (c) Diversification.
Advantages/Disadvantages of Different Modes of
Entry
 Complexities of International Business
1) Language Barriers
When engaging in international business, it’s important to consider the languages spoken in the countries to which
you’re looking to expand.
Does your product messaging translate well into another language? Consider hiring an interpreter and consulting a
native speaker and resident of each country.
One example of a product “lost in translation” comes from luxury car brand Mercedes-Benz. When entering the
Chinese market, the company chose a Mandarin Chinese name that sounded similar to “Benz”: Bēnsǐ. The name
translates to “rush to death” in Mandarin Chinese, which wasn’t the impression Mercedes-Benz wanted to make
with its new audience. The company quickly adapted, changing its Chinese name to Bēnchí, which translates to
“run quickly, speed, or gallop.”

2) Cultural Differences

Just as each country has its own makeup of languages, each also has its own specific culture or blend of cultures.
Culture consists of the holidays, arts, traditions, foods, and social norms followed by a specific group of people. It’s
important and enriching to learn about the cultures of countries where you’ll be doing business.
One example of a cultural difference between the United States and Spain is the hours of a typical workday. In the
United States, working hours are 9 a.m. to 5 p.m., often extending earlier or later. In Spain, however, working hours
are typically 9 a.m. to 1:30 p.m. and 4:30 to 8 p.m. The break in the middle of the workday allows for a siesta,
which is a rest taken after lunch in many Mediterranean and European countries.

3. Managing Global Teams

Another challenge of international business is managing employees who live all over the world. When trying to
function as a team, it can be difficult to account for language barriers, cultural differences, time zones, and varying
levels of technology access and reliance.
To build and maintain a strong working relationship with your global team, facilitate regular check-ins, preferably
using a video conferencing platform so you can interact in real time.
4. Currency Exchange and Inflation Rates
The value of a dollar in your country won’t always equal the same amount in other countries’ currency, nor will the
value of currency consistently be worth the same amount of goods and services.
It’s also important to monitor inflation rates, which are the rates that general price levels in an economy increase
year over year, expressed as a percentage. Inflation rates vary across countries and can impact materials and labor
costs, as well as product pricing.
Understanding and closely following these two rates can provide important information about the value of your
company’s product in various locations over time.

5. Nuances of Foreign Politics, Policy, and Relations

Business doesn’t exist in a vacuum—it’s influenced by politics, policies, laws, and relationships between countries.
Because those relationships can be extremely nuanced, it’s important that you closely follow news related to
countries where you do business.
The decisions made by political leaders can impact taxes, labor laws, raw material costs, transportation
infrastructure, educational systems, and more.
One hypothetical example Reinhardt presents in Global Business is that if the Chinese government decided to
subsidize Chinese dairy farms, it would impact dairy farmers in all surrounding countries. This is because, with extra
funding, Chinese dairy farms may produce a surplus of dairy products, causing them to expand their markets to
neighboring countries.

Global business comes with unique challenges but can be an opportunity for enormous organizational growth. To
prepare for those challenges, vary your news intake and closely follow foreign politics, make connections in
countries where you hope to do business, invest in interpreters to overcome language barriers, and consider taking
a global business course to develop your international business skills and prepare for today's nuanced,
interconnected business world.