CHAPTER 1

LEARNING OBJECTIVES
At the end of this chapter, the reader should be able to:
Describe

International Business and Globalization of Markets Explain why firms internationalize Explain the differences between international business and domestic business Explain different types of risk involve in International Business

Basic Concepts and Definition

International Business
Commercial transactions that take place between two or more

nations or cross border Economic system of exchanging good and services, conducted between individuals and businesses in multiple countries.

Nature of International Business

All value-adding activities can be performed in international

locations The subject of cross-border trade can be products, services, capital, technology know how, and labor (market offerings) Firms internationalize through exporting, foreign direct investment, licensing, franchising, and collaborative ventures

Basic Concepts and Definition-cont.

Globalization of Markets
Ongoing

economic integration interdependency of countries worldwide

and

growing

The Dimensions of Market Globalization consist of:

Greater

integration and interdependency of national economies; leading to freer movement of goods, services, capital, and knowledge Rise of regional economic integration blocs Growth of global investment and financial flows Convergence of consumer lifestyles and preferences Globalization of production

International Business Key Players

Multinational Enterprise (MNE) Small and Medium-Sized Enterprise (SMIE) International Direct Venture Firm (Born Global Firms)

International Business Key Players

Multinational enterprise (MNE)
A large company with substantial resources performing various

business activities through a network of subsidiaries and affiliates located in many countries around the world for example Citibank, Wal-Mart, IKEA, Nokia, etc.

Small and medium-sized enterprise (SMIE)

Most of the definition mainly focus on the number of employees that

the company currently engaged in. In the United States, a company is considered as SMIE if its current number of employees is less than 500. But, in other less developed economies, the number of employees is adjusted to reflect the growth of the local economy.

International direct venture firm (Born Global Firms)

Due to rapid advancement of technology, many young, energetic,

entrepreneurial companies take a shorter route to establish themselves by launching international business activities directly at their primary evolution.

Modes of International Business

Merchandise Exports and Imports Performance of Services: Turnkey Operations; Management Contracts Use of Assets: Licensing Agreements, Franchising Investments: FDI & Portfolio Investment Strategic Alliance: Joint Venture

Modes of International Business

Merchandise Exports and Imports:
Importing

or Global Sourcing means the procurement of products or services from suppliers located abroad for consumption in the home country or a third country.

Exporting means the sale of products or services to

customers located abroad, from a base in the home country or a third country.

Modes of International Business-cont.

Performance of Services: Turnkey Operations
Turnkey contracting refers to an arrangement where

the focal firm or a consortium of firms plan, finance, organize, manage, and implement all phases of a project abroad and then hand it over to a foreign country after training local personnel. Among the most popular turnkey projects are extensions and upgrades to metro systems, such as bridges, roadways, and railways. the firm contracts to build a major facility abroad, operates the facility for a specified period, and then transfers its ownership to the project sponsor, typically the host-country government or public utility. Examples of BOT projects are dam and water treatment plant.

Under a build-operate-transfer (BOT) arrangement,

Modes of International Business-cont.

Performance of Services: Turnkey operations
Management

contract refers to a contractor supplies managerial know-how to operate a hotel, resort, hospital, airport, or other facility, in exchange for compensation e.g. most of Disneys income derive from its theme parks in France and Japan.

Modes of International Business-cont.

Use of Assets: licensing agreements, royalties,

franchising

International licensing is an entry mode in which a foreign

licensor grants specified intangible property rights to the local licensee for a specified period of time in exchange for a royalty fee. For instance, Time Warner Company licenses images from the Harry Potter books and movies to companies worldwide. grants specified intangible property rights to the franchisee, which must stand by strict and detailed rules as to how it does business.

International franchising happens when foreign franchisor

All the production equipment, managerial system, promotional material and anything else comes from the franchisor in exchange for a royalty fee. In other words, franchising is an arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties or other forms of compensation e.g. McDonalds, Subway,

Modes of International Business-cont.

Investments:
Foreign Direct Investment of FDI (typically long-

term) is an internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant, and equipment.
Portfolio Investment (typically short-term) is the

passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns e.g. stocks in a company or loans to a company or country in the form of bonds, bills, or notes that the investor purchases.

Modes of International Business-cont.

Other Operational Definitions
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.

The alliance is a cooperation or collaboration which

aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses and shared risk.

Why do firm internationalize?

Obtain new opportunities for growth and earn higher returns on investment Expand new ideas about products and services and business methods
Deal with international competitors more effectively or thwart the development of competition in the home market Increase economies of scale in sourcing, production, marketing and R&D Be nearer to lower-cost or better value factors of production Invest in profitable venture with a foreign partner

International Business vs Domestic Business

Cost
tariffs, time costs due to border delays , costs associated with

country differences such as language, the legal system or a different culture. Currencies Management Risk Level of complexity and risk of the business nature , unknown political, social and economic systems. International Business may yield superior performance through: Maximizing returns and market share, attaining global scale economies, the ease to acquire resources and cost, enhanced competitiveness , superior knowledge transfer

Risks in international business

Business risk
Economic risk Political and legal risks Culture risk

Risks in International Business

Business risk is a firms potential loss or failure from

poorly developed or executed business strategies, tactics, or procedures.

Less than optimal formulation and/or implementation

of strategies, tactics or procedures, e.g. partnering Selections, market entry timing, pricing, product features, and promotional themes poor Execution of strategy and competitive intensity.

Risks in International Business

Economic risk is the risk of adverse unexpected fluctuations in

exchange rates, inflation and other harmful economic conditions create uncertainty of returns.
For example, if money must be converted into a different currency

to make a certain investment, changes in the value of the currency relative to the U.S. dollar will affect the total loss or gain on the investment when the money is converted back. This risk usually affects businesses, but it can also affect individual investors who make international investments. Sometimes, this term is also called exchange rate risk.

Risks in International Business.

Political and legal risks is the potentially adverse effects on

company operations and profitability holes by developments in the political, legal, and economic environment in a foreign country.
Differences in host country political, legal and economic regimes

may adversely impact firm profitability. Changes in the laws, regulations and indigenous factors such as property rights, intellectual-property protection, product liability, taxation policies, inflation, national debt, and unbalanced international trade. The level of government intervention.

Risks in International Business

Culture risk involves a situation or event whereby a

cultural miscommunication can put a damper on business dealings and at the same time place human value at risk.
Foreign

customers attitude and behavior significantly from those buyers at home.

differ