INTERNATIONAL BUSINESS

MANAGEMENT

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 CHAPTER ONE
INTERNATIONAL
BUSINESS(IB) :OVERVIEW

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 1.1 International Business : Overview
 It can be described as the business carried on
across the national borders b/n two or more
nations.
 The expansion of business functions to various
countries with an objectives of fulfilling the needs
& wants of international customers.
 It refers to firms that engage in international trade
& investments.
 A firm does not have to become a multinational
enterprise, investing directly in operations in other
countries, to engage in international business.
o It is nothing but extending the areas of activities of
business across the boundaries/beyond boundary
of a given sovereign nation.
o Can be carried out by a government or individuals 3
 Primary types of international business are export–
import trade & direct foreign investment. The latter
is carried out in varied forms, including wholly
owned subsidiaries & joint ventures.
 Additional types of international business are
licensing, franchising, & management contracts.
E.g.
 Midroc
 Salini Construction, Italian,
 Heineken, Holland, Available in 170 countries

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 The Need For IB
 It causes the flow of ideas, services, & capital
across the world.
o Manufacturing firms, as well as service
companies/ banks, airline, insurance,
consulting firms have extensive global
operations.
o Necessary b/c economic isolation has become
impossible
 Offers companies new markets.
 Innovations can be developed & disseminated
more rapidly, human capital can be used better,
financing can take place more quickly.
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 Offers consumers new choices. It can permit the
acquisition of a wider variety of products, both in
terms of quantity & quality & do so at reduced
prices through international competition.
 Facilitates the mobility of factors of production
except land & provides employment opportunities
to individuals.
 It reallocates resources, makes preferential
choices, & shifts activities on a global level.
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 International Business Questions
How will an idea, good, or service fit into
the international market?
Should trade or investment be used to enter
a foreign market?
Should supplies be obtained domestically or
abroad?
What product adjustments are necessary to
be responsive to local conditions?
What are the threats from global
competitors, & how can these threats be
counteracted?
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Important Reasons for Going International
Profit Advantage
 An important incentive for international business is the
profit advantage. International business could be more
profitable than the domestic.
 One of the important motivations for foreign investment is
to reduce the cost of production (by taking advantage of the
cheap labor).
 While in some cases, the whole manufacturing process of a
product may be carried out in foreign locations, in some
cases only certain of it are done abroad.
 E.g. 20 percent of the merchandise imported into United
States is manufactured by foreign branches of American
companies.

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Growth Opportunities
 To take advantage of the business opportunities in
other countries.
 MNCs are getting increasingly interested in a
number of developing countries as the income &
population are rapidly rising in these countries.
 Many companies could achieve the growth they
realized only because of the foreign markets.
 Foreign markets both in the developed country &
developing country, provide enormous growth
opportunities for firms of the developing country
too.

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 Domestic Market Constraints
 Drive many companies towards expanding the
market beyond the national border.
 The market for a number of products tend to
saturate or decline in the advanced countries.
 This often happens when the market potential has
been almost fully tapped. For example, in the United
States, the stock of several consumer durables like cars,
TVs, etc. exceed the total number of households.

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 Another type of domestic market constraint arises
from the scale economies.
 The technological advances have increased the size of
the optimum scale of operation substantially in many
industries making it necessary to have foreign market,
in addition to the domestic market, to take advantage
of the scale economies.
 For example, for a certain chemical product, the
minimum economic size of the plant is 35,000 tones
but the demand for it in India by the end of the
century is expected to be less than 10,000 tones.
 In the automobile industry, an efficiently scaled
factory is one designed to produce about 200,000
units a year.
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 Competition
 Competition may become a driving force behind
internationalization. A protected market does not
normally motivate companies to seek business
outside. Example:
 Until the liberalization which started in July
1991, the Indian economy was a highly protected
market.
 Not only that the domestic producers were
protected from foreign competitors but also
domestic competition was restricted by several
policy induced entry barriers, operated by such
measures as industrial licensing, etc.
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Government Policies and Regulations
 Government policies & regulations may also motivate
internationalization.
 There are both positive & negative factors which could
cause internationalization.
 Many governments offer a number of incentives & other
positive support to domestic companies to export & to
invest in foreign countries.
 Similarly, several countries give & encourage import
development & foreign investment.
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Monopoly Power
 In some cases international business is a result of the
monopoly power which a firm enjoys internationally.
 Monopoly power may arise from such factors as
monopolization of certain resources, patent rights,
technological advantage, product differentiation, etc.
 Such monopoly power need not necessarily be an
absolute one but a dominant position that may
facilitate internationalization.
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Spin-off/Bonus Benefits
 International business may help the company to improve
its domestic business; by doing so it helps improve the
image of the company.
 International business becomes a means of gaining better
market share domestically.
 Further, exports may have pay-offs for the internal market
too by giving the domestic market better products.
 Thus, the foreign exchange earnings may enable a
company to import capital goods, technology, etc.
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 Strategic Vision
 The systematic & growing internationalization of
many companies is essentially a part of their business
policy or strategic management.
 The stimulus for internationalization comes from the
urge to grow, the need to become more competitive,
the need to diversify & to gain strategic advantages
of internationalization.
 There are a number of corporations which are truly
global. 16
1.2. Domestic vs. International Business
 Just from the nature /area of a market to be served
points of view, business will fall into domestic &
international.
 The differences arise from the simple fact that
countries are different.
 E.g. Marketing a product in Ethiopia may require
a different approach from marketing the product
in Italy.
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 Domestic vs International business
Criteria to Domestic business International business
differentiate
Customers to be served Almost homogeneous Unrelated
Nature of product Same/related/standard Needs adaptaion
Pricing method and Related Quite different
amount
Promotional method Makes use of local Different
language
Distribution methods Can be direct or Can be direct or
indirect indirect /export
Degree of risk Limited Too much
Cost of production Depends up on cost of Depends up on cost of
raw materials available raw materials available
locally locally/international

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Domestic vs International business
Rules and Almost the same Quite different
regulations set by
government
Culture Quite related Unrelated
Economic system Is one type Can be free,
command or
mixed
Attitude towards a Related Unrelated
product
Political system Related Unrelated

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1.3 Why Study International Business Management?

Significant differences exist in countries such as:

o Consumer tastes and preferences

o Distribution channels/intermediaries

o Culturally embedded value systems

o Economic systems

o Legal systems
 These differences require that product features, product
mix, marketing strategies & operating practices are
customized to match conditions of a particular country.
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 E.g. IBM must make dozens of different
keyboards to match different languages.
 White indicates death and mourning in
China, Japan and Korea;
 Green is sickness in Malaysia.

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 What is Globalization?

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1.4 Globalization
 It is the increased mobility of goods, services,
labor, technology, & capital throughout the
world.
 It refers to the shift toward a more integrated &
interdependent world economy
 Is closely related to the idea of running business
globally while making use of one or more
foreign market entry strategies.
 It reflects the trend of firms buying, selling &
distributing products & services in most
countries & regions of the world.

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 It is the closer integration of countries & people of
the world which has been brought about by the
enormous reduction costs of transportation,
communication, & the breaking down of artificial
barriers to the flows of goods, services, capital,
knowledge/people across borders.
 It stimulates economic growth, raises the incomes
of consumers, & helps to create jobs in all countries
that participate in the global trading system.

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Globalization/key facets may be classified as:

1) The Globalization of Markets, and

2) The Globalization of Production

1) The Globalization of Markets
 It refers to the merging of historically distinct & separate
national markets into one global marketplace.
 The lowering of barriers to international trade enables
firms to view the world, rather than a single country, as
their market.

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Regional Economic and Political Integration
o E.g. European Union (EU) lower and eliminate
barriers and promote trade within these markets.
o The tastes & preferences of consumers in different
nations are beginning to converge/similar on some
global norm.
 Global teenagers & Global elite
o E.g. Coca Cola soft drink,, MTV etc.
 In many global markets, the same firms frequently
confront each other as competitors in nation after
nation.
o E.g. Coca-Cola’s rivalry with Pepsi Co is a global
one, the rivalries between Ford and Toyota etc.

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 As firms follow each other around the world, they
bring the assets that served them well in other
national markets including:
o their products, operating strategies, marketing

strategies, & brand names creating some

homogeneity across markets.
 Greater uniformity replaces diversity.
 For many firms there is only the global market.

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 But many enterprises have discovered that foreign
consumers differ from domestic consumers, &
customize goods & services to better match local
demand.
 Example: Automobile firms such as Toyota &
Ford might like to design cars they can sell the
same way worldwide to realize substantial scale
economies, reality requires that cars & their
marketing be tailored to different regions.
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 There are still major differences between
nations in:
o business systems, culture, legal systems,
o infrastructure, &
o overall level of economic development, & this
works against treating the world as a Single
Global Marketplace.

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2) Globalisation of Production
 It refers to the sourcing of goods & services from
locations around the globe to take advantage of
national differences in the cost & quality of
factors of production(labor, energy, land &
capital).
 The lowering of trade & investment barriers
allows firms to base production at the optimal
location for that activity.
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 A firm might design a product in one country,
produce component parts in other countries,
assemble the product in yet another & then export
the finished product around the world.
 Example: Boeing’s 777, 30 percent of it, by value,
is built by foreign companies by outsourcing.
 Eight Japanese suppliers, three suppliers in Italy
& a supplier in Singapore.

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 For jet airliner, the 787, Boeing is pushing this
trend even further, with some 65 percent of the
total value of the aircraft to outsource to foreign
companies,
 A global web of suppliers yields a better final
product, which enhances Boeing’s chances of
winning a greater share of total orders for aircraft
than its global rival, Airbus Industry.

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 Companies are using modern communications
technology, the Internet to outsource service
activities.
 E.g. The Internet has allowed hospitals to outsource
some radiology work from USA to India, where
images from MRI scans & the like are read at U.S.
 E.g. Accounting work is being outsourced from
America to India. In 2010, some 400,000 individual
tax returns were compiled in India.

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 The Emergence of Global Institutions
 Institutions that emerged as a result of globalisation
promoted the establishment of multi national
treaties to govern the global business system.
 They help manage & regulate the global market
place & to promote the establishment of
multinational treaties to govern the global business
systems.
1.The General Agreement on Tariffs and trade (GATT)
2. World Trade Organization (WTO)
3. The International Monetary Fund (IMF)
4. United Nations (UN)

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GATT/WTO
 Policing the world trade system to ensure that member
nations adhere to the rules laid down in trade treaties.
 Promote lowering of barriers to cross-border trade and
investment
 Currently, its 164 members accounted for 97% of
world trade.
IMF (1944)
 Lender of last resort to nations whose economies are
in crisis/turmoil & currencies are losing value against
other international currencies/balance of payments
problems.
 Maintains order in the international monetary system.

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 IMF loans usually require governments to
undergo structural economic policies & reforms.
 Policies may include free trade, stringent/severe
fiscal & monetary policies & promotion of
private enterprises.
 It provides the governments & central banks of its
member countries with technical assistance &
training in its areas of expertise.

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The World Bank, 1944
 was set up to promote economic development by
making low interest rate loans to cash strapped/poor
nations especially that want to undertake:
o Infrastructural or investments loans (such as building
dams, roads, transport facilities ...).
o Adjustment loans to support structural reforms in a
specific sector or the economy( e.g. agriculture,
trade…).
 It has goals for improving education, reducing child
mortality, achieving economic development &
improved standards of living through loans, policy
advice, & technical assistance.

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 UN (1945)
 Today nearly every nation in the world belongs to
the United Nations; membership now totals 191
countries.
 Committed to preserving peace through
international cooperation & collective security.
 The UN Charter sets out basic principles:
o To maintain international peace and security
o Develop friendly relations among nations
o Cooperate in solving international problems
o Promote respect for human rights, higher standards of
living, full employment & economic developments in
member nations.

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 1.5 Drivers of Globalization/IB
Main Factors:
1. The Decline in barriers to the free flow of
goods, services, & capital after World war II.
2. Technological Change

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1. The Decline in barriers to the free flow of
goods, services, & capital after World war II.
o After 1945 many of the world’s nation-states
became open to international trade & foreign
direct investment.
o Foreign direct investment (FDI) occurs when a
firm invests resources in business activities
outside its home country.

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2.Rapid Technological Change
 Advances in telecommunication (internet & the
world wide web).
 The manufacturing of the microprocessor
enabled developments in high-powered, low-cost
computing.
 Increase in the amount & quality of information
that can be processed in the shortest possible
time.
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 Manufacturing of commercial jet aircraft & super
freighters reduced time & cost for travelling,
resulting in mass movement of people.
 Containerization reduces cost of shipping of goods
over long distances.
 Transportation is creating a global village.
 For example, due to the tumbling costs of shipping
goods by air, flowers grown in Ethiopia can be cut &
sold in New York while they are still fresh.
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1.6 Opportunities and Challenges in IB
 Opportunities
o Adoption of free-liberal investment policies by
many nations
o Packages of incentives given by government of
many nations
o Packages of guarantee given by government of
many nations
o Falling interest rates to borrow
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o Emergence of latest IT-technology

o Emergences of many more international

agreements
o Emergences of many more regional integration
activities
o Multilateral institutions

o International economic integration

o Mover towards free marketing system

o Investing in research & development

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 Threats
o Entry barriers: are factors that make it costly
for potential competitors to enter an industry.
o Exit barriers: the fixed costs of closing down
capacity, lay off employees, government
regulations etc.
o Domestication/ citizen requirements
o Differences in legal, economic, cultural,
environment
o Foreign exchange risks.
o Political/economic instabilities

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o Natural catastrophe
o Possibility of facing business risks
o Differences in employment recruitment,
selection etc.
o Rising interest rates to borrow
o War and civil disturbances

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 Argument Against Globalisation
 Many experts believe that globalization is promoting
greater prosperity in the global economy, more jobs, &
lower prices for goods & services.
 Others agree that globalization has done more harm than
good.
1)Globalization, Jobs, and Income
Critics
o Unemployment/job losses in developed nations
o Exporting jobs to low-wage nations & contributing to
higher unemployment & lower living standards in their
home nations.
o Falling barriers has destroyed manufacturing jobs in
wealthy advanced countries. E.g. USA
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 Supporters claim while some jobs may be lost,
the economy as a whole is better off.
o Free trade will result in countries specializing in
the production of those goods & services that they
can produce most efficiently, while importing
goods & services that they cannot produce as
efficiently, & in doing so, all countries will gain.

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2)Globalization, Labor Policies & Environment
 Critics argue that free trade enables firms to
move manufacturing facilities from developed
countries to developing countries that lack
adequate regulations to protect labour & the
environment.
 Free trade lead to an increase in pollution & result
in firms from advanced nations exploiting the
labor of less developed nations
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 Supporters claim that because free trade
enables developing countries to increase
their economic growth rates & become
richer, this should lead to tougher
environmental & labor laws.
 Free trade does not lead to more pollution
& labor exploitation, it leads to less.

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3)Globalization and National Sovereignty
 Critics, today’s increasingly interdependent global
economy shifts economic power away from national
governments & toward supranational organizations such as
WTO, EU & the UN.
 As perceived by critics, unelected bureaucrats now impose
policies on the democratically elected governments of
nation-states, undermining the sovereignty of those states
& limiting the nation’s ability to control its own destiny.

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 Supporters argue that real power still
resides with individual nation-states, not
supranational organizations.
o Without the support of members, the
organizations have no power

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4)Globalization and the World’s Poor
 Critics argue that the gap between rich & poor has
gotten wider & the benefits of globalization have not been
shared equally.
 In 1870, the average income per capital in the world’s 17
richest nations was 2.4 times that of all other countries.
 In 1990, the same group was 4.5 times as rich as the rest.
 Supporters argue that none of which have anything to
do with free trade or globalization.

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 Many of the world’s poorest countries have suffered
from totalitarian governments, economic policies
that destroyed wealth rather than facilitated its
creation, endemic corruption, scant protection for
property rights, & war.
o A complicating factor is the rapidly expanding
populations in many of these countries.
o Without a major change in government, population
growth may aggravate/worsen their problems.
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 END
THANK YOU
FOR
YOUR ATTENTION

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