IB Handouts # 1

Nature of International Business

What is International Business?

John D. Daniels and Lee H. Radebaugh have defined international business as all business
transactions—private and governmental—that involve two or more countries. Further,
according to Michael R. Czinkota, "International business consists of transactions that are
devised and carried out across national borders to satisfy the objectives of individuals,
companies, and organizations.

International Business implies Exchange of goods, services, resources, and knowledge between
individuals, companies, and organizations in different countries. Such exchange takes place in
the following ways:
 International Trade: Export, Import,
 Foreign Direct Investment
 Foreign Institutional Investment
 Licensing and Franchising
 Joint Venture

It helps the countries as well as companies leverage countries-specific advantages as well as

firm-specific advantages in global trade scenarios.

Why is it important to study international business today?

International Business is a very important aspect of the contemporary world. International

Business helps the markets, economies, communities and the governments in different
countries of the world in the following ways:

 Economic Growth:
o International trade drives economic growth by facilitating the exchange of
goods and services, leading to increased production and consumption.
o It fosters investment and entrepreneurship across borders.

 Access to New Markets:

o Businesses can expand their reach beyond domestic markets, tapping into new
customer bases and increasing revenue potential.
o This allows for diversification and reduces reliance on a single market.

 Resource Optimization:
o Countries can specialize in producing goods and services where they have a
comparative advantage, leading to more efficient use of resources.
o Businesses can access raw materials, labor, and technology from around the
world.

 Increased Innovation and Technology:

o International competition encourages businesses to innovate and improve their
products and services.
 o The exchange of ideas and technologies across borders fosters technological
advancement.

 Job Creation:
o International trade and investment create employment opportunities in both
exporting and importing countries.

 Cultural Exchange:
o International business promotes cultural exchange and understanding, fostering
greater global cooperation.

 Enhanced Standard of Living:

o International trade provides consumers with access to a wider variety of goods
and services, often at competitive prices, which contributes to a higher standard
of living.

 Political Cooperation:
o Economic interdependence can foster stronger political relationships between
nations.

In essence, international business is a driving force behind globalization, contributing to

economic prosperity, technological advancement, and cultural exchange.

What are the characteristics of International Business?

The underlying characteristics of International Business may be summarized as under:

1) Large scale operations: In international business, all the operations are conducted on
a very huge scale. Production and marketing activities are conducted on a large scale.
It first sells its goods in the local market. Then the surplus goods are exported.

2) Integration of economies: International business integrates (combines) the economies

of many countries. This is because it uses finance from one country, labor from another
country, and infrastructure from another country. It designs the product in one country,
produces its parts in many different countries and assembles the product in another
country. It sells the product in many countries, i.e. In the international market.

3) Dominated by developed countries and MNCs: International business is dominated

by developed countries and their multinational corporations (MNCs). At present, MNCs
from USA, Europe, and Japan dominate (fully control) foreign trade. This is because
they have large financial and other resources. They also have the best technology and
research and development (R & D). They have highly skilled employees and managers
because they give very high salaries and other benefits. Therefore, they produce good
quality goods and services at Low prices. This helps them to capture mid dominate the
world market.

4) Benefits to participating countries: International business gives benefits to all

Participating countries. However, the developed (rich) countries get the maximum
benefits. The developing (poor) countries also get benefits. They get rapid industrial
development. They get rapid industrial development. They get more employment
 opportunities. All this results in the economic development of the developing countries.
Therefore, developing countries open up their economies through liberal economic
Policies.

5) Keen competition: International business has to face keen (too much) competition in
the world market. The competition is between unequal partners i.e., developed and
developing countries. In this keen competition, developed countries and their MNCs
are in a favorable position because they produce superior quality goods and services, at
very low prices. Developed countries also have many contacts in the world market. So,
developing countries find it very difficult to face competition from developed countries.

6) The special role of science and technology: International business gives a lot of
importance to science and technology. Science and Technology (S & T) help the
business to have large-scale production. Developed countries use high technologies.
Therefore, they dominate global business. International business helps them to transfer
such top high-end technologies to the developing countries.

7) Sensitive nature: The international business is very sensitive in nature. Any changes
in the economic policies, technology, political environment, etc. have a huge impact on
it. Therefore, an international business must conduct marketing research to find out and
study these changes. They must adjust their business activities and adapt accordingly
to survive changes.

8) Involvement of Multinationals: A multinational company (MNC) is a corporate

organization that owns and controls the production of goods or services in at least one
country other than its home country. MNCs involve in international business abroad
simply to diversify business risks.

9) Increased investment opportunities: with globalization companies can move the

capital to whatever country offers the most attractive investment opportunity. This
prevents capital from being trapped in domestic economies earning poor returns.

10) Earn foreign exchange: Countries export their goods and services all over the world.
, This helps to earn valuable foreign exchange. This foreign exchange is used to pay for
imports. Foreign exchange helps to strengthen the economy of its country.

11) Optimum utilization of resources: International trade makes optimum utilization of

resources. This is because it produces goods on a very large scale for the international
market. International trade utilizes resources from all over the world.

Why companies engage in international business?

International business helps the companies grow globally in the following ways:

• Expanding markets: Accessing new customers and increasing sales (Examples:

McDonald’s, Netflix, Meta, Zara, Apple, etc.)

• Acquiring resources: Obtaining raw materials, labor, or technology that may not be
available in the home country. (Examples: ExxonMobil and Shell invest heavily in
exploration and extraction projects in countries rich in oil and gas reserves. Rio Tinto
 and BHP Billiton operate mines across the globe, extracting minerals like iron ore,
copper, and gold. Companies like Apple and Samsung rely on global supply chains,
with manufacturing facilities located in countries like China, Vietnam, and Mexico.
Automakers like Toyota and Volkswagen have established manufacturing plants in
various countries to take advantage of local labor costs and market access.

• Reducing costs: Taking advantage of lower labor costs or production costs in foreign
countries. (Examples: Many electronics and apparel companies, like Apple and Nike,
outsource manufacturing to countries with lower labor costs, such as Vietnam,
Bangladesh, and China. This dramatically reduces production expenses.)

• Gaining a competitive advantage: Developing new products or services, or improving

efficiency through international experience. (Examples: Coca-Cola has built a powerful
global brand through consistent marketing and advertising campaigns. This brand
recognition provides a significant competitive advantage, allowing them to maintain
market share in diverse markets. Nike's global marketing strategy, featuring
endorsements from prominent athletes, has created a strong brand image that resonates
with consumers worldwide. This allows them to command premium prices and
maintain a competitive edge.)

What are the different ways in which companies can expand their markets globally?

Companies can expand their markets globally by way of Franchise, Localization, and supply
chain integration.

 Franchise Model:
o McDonald's success is largely attributed to its franchise model, allowing local
entrepreneurs to operate restaurants while adhering to brand standards.
o This approach facilitates rapid expansion and adaptation to local markets.

 Localization:
o Netflix has leveraged this model profusely.
o They adapt their menus to cater to local tastes, offering regional specialties
alongside core menu items. This demonstrates a deep understanding of
cultural nuances.
o Netflix invests heavily in producing and acquiring local content, appealing to
diverse audiences worldwide.
o This strategy has been crucial in gaining market share in competitive
international markets.
o They have used a strategy of starting in geographically close markets, and then
expanding outwards. This allows them to learn and adjust their practices.

 Global Supply Chains:

o Technology companies like Apple, Meta etc. have leveraged this model for
global expansions. Each giant relies on complex global supply chains for
manufacturing and distribution.
o This allows them to leverage cost efficiencies and access specialized
resources.
o Companies like Meta (Facebook, Instagram) utilize digital platforms to reach
global audiences, overcoming geographical barriers.
 o Apparel company Zara has also leveraged integration of supply chain for
global expansion.

Successful global expansion requires adapting products, services, and marketing strategies to
local cultures and preferences. Further, forming partnerships with local businesses can facilitate
market entry and navigate regulatory complexities. Technology plays a crucial role in enabling
global communication, logistics, and e-commerce.

Quiz for Self-Assessment

According to Daniels and Radebaugh, international business involves:

 a) Only private transactions.
 b) Only governmental transactions.
 c) All business transactions involving two or more countries.
 d) Only domestic transactions.

Michael R. Czinkota defines international business as:

 a) Transactions within national borders.
 b) Transactions devised and carried out across national borders.
 c) Only the exchange of goods.
 d) Only foreign direct investment.

Which of the following is NOT a form of international business exchange mentioned in

the text?
 a) International Trade.
 b) Foreign Direct Investment.
 c) Domestic Retail Sales.
 d) Licensing and Franchising.

International business contributes to economic growth by:

 a) Restricting trade between nations.
 b) Facilitating the exchange of goods and services.
 c) Limiting investment opportunities.
 d) Decreasing production and consumption.

Accessing new customer bases and increasing revenue potential is related to:
 a) Resource optimization.
 b) Access to new markets.
 c) Cultural exchange.
 d) Political cooperation.

Specializing in producing goods and services based on comparative advantage refers to:
 a) Job creation.
 b) Resource optimization.
 c) Increased innovation.
 d) Cultural exchange.
International business fosters technological advancement through:
 a) Limiting the exchange of ideas.
 b) Encouraging international competition.
 c) Restricting access to technology.
 d) Decreasing the need for innovation.

Which of the following is a characteristic of international business?

 a) Small-scale operations.
 b) Integration of economies.
 c) Limited competition.
 d) Solely domestic focus.

International business is primarily dominated by:

 a) Developing countries.
 b) Small local businesses.
 c) Developed countries and MNCs.
 d) Non-profit organizations.

Developed countries have an advantage in international business due to:

 a) Limited financial resources.
 b) Lack of technological advancements.
 c) Large financial resources and advanced technology.
 d) High labor costs.

International business helps developing countries by:

 a) Limiting their industrial development.
 b) Creating job opportunities.
 c) Increasing their reliance on imports.
 d) Hindering economic development.

A key characteristic of international business is:

 a) Limited sensitivity to external changes.
 b) High sensitivity to economic and political changes.
 c) Lack of competition.
 d) Minimal involvement of MNCs.

MNCs engage in international business to:

 a) Only operate in their home country.
 b) Diversify business risks.
 c) Avoid competition.
 d) Focus on local markets.

International trade helps countries to:

 a) Limit foreign exchange earnings.
 b) Earn valuable foreign exchange.
 c) Decrease resource utilization.
 d) Increase domestic isolation.
Companies engage in international business to:
 a) Limit their market size.
 b) Acquire resources.
 c) Increase domestic competition.
 d) Reduce domestic production.

Outsourcing manufacturing to countries with lower labor costs is a strategy for:

 a) Increasing costs.
 b) Reducing costs.
 c) Limiting resource acquisition.
 d) Decreasing competitive advantage.

A franchise model in international business allows for:

 a) Centralized control only.
 b) Local entrepreneurs to operate under brand standards.
 c) Limited market expansion.
 d) Uniform menus globally.

Localization in international business involves:

 a) Standardizing products globally.
 b) Adapting products and services to local tastes.
 c) Ignoring cultural nuances.
 d) Focusing on domestic markets.

Global supply chains enable companies to:

 a) Increase production costs.
 b) Leverage cost efficiencies and access specialized resources.
 c) Limit market reach.
 d) Decrease product distribution.

Successful global expansion requires:

 a) Ignoring local cultures.
 b) Adapting to local cultures and preferences.
 c) Limiting partnerships with local businesses.
 d) Avoiding the use of technology.