introduction of international business

8/4/2019 Introduction of International Business

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INTRODUCTION OF

INTERNATIONAL BUSINESS


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Introduction

Business is defined as a set of activities relating toindustry and commerce.When these activities are performed on an

international level, these can be termed asinternational business.Basic functions, processes and techniques of

international business are essentially the same asthose involved in domestic business. What is different

is the environment within which these functions areperformed and processes are carried out,


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While doing business within one's own country, one isfamiliar with most of the environmental factors and isreadily able to cope with them.

But the task of managing international business is notthat easy. Because of operating in environments

which are unfamiliar and different from the domesticenvironment, one needs to be extra careful and

vigilant to these environmental differences. Thesevariations may need adaptation for business success.


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Definition

International Business means carrying businessactivities beyond national boundaries. It normallyincludes the transactions of economic resources such

as goods, capital, services(comprising technology,skilled labour, transportation, etc.) & internationalproduction.

Production may include production of physical goods

or provision of services like banking, finance,insurance etc..


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DEFINITION OF INTERNATIONAL BUSINESS

In todays technology-connected global economy, evensmall businesses can compete in theinternational marketplace.According to business directory.com

Definition 1The economic system of exchanging good and services,conducted between individuals and businesses in multiplecountries.

Definition 2

The specific entities, such as multinational corporations(MNCs) and international business companies (IBCs), whichengage in business between multiple countries


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DEFINITION OF INTERNATIONAL BUSINESS

International Business is all business transactions that involvetwo or more countries.

International Business comprises a large and growing portion ofthe worlds total business.

International Business usually takes place within a more diverseexternal environment.

Internationaltrade is a vital part of the economy

Trade has contributed to world wide economic growth


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Why Companies Engage in International Business

A) To Expand Sales: company's sales are dependent on twofactors: the consumers interest in their product or servicesand the consumers ability and willingness to buy them.

B) Acquire Resources: products, services, technology, andinformation

C) Diversify Sources of Sales and Supplies

D) Minimize Competitive Risk: companies moveinternationally for defensive reasons. Profits from one marketcan be used to expand operations in other markets


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Reasons for Recent International Business Growth

Expansion of Technology: transportation, telecommunications; Transportation and telecommunications costs are more

conducive for international operations.

Liberalization of Cross-Border Movements: goods, services, labour, Capital

Development of Supporting Institutional Arrangements:development by business and governments of institutions that

enable us to effectively apply that technology. Increase in Global Competition: new products become global; Globalization of production


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Reasons for trade

Non availability of goods permanent non-availability Temporary non-availability product differentiation

Differences in technology Principle of absolute advantage (A. Smith) Principle of comparative advantage (D. Ricardo) Differences in factor endowments Heckscher-Ohlin Theorem

Differences in consumer demand Transport costs Economies of scale in production Government policies


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Trade policies

Trade policies aimed to protect domestic producers do usually reducesocial welfare

Tariffs, import quotas, tariff rate quotas, variable levies, state tradingAt a specific point in time, the effects of import quota and tariffs are

similar Given the dynamic of price changes, tariffs are preferable to other

import restrictions since world price changes are transmitted to thedomestic market Export subsidies

Export subsidies do not only reduce domestic welfare, they are alsocostly for the national

Budget

Foreign exporters suffer, while foreign importer benefit from exportsubsidies Price discrimination

they realize an additional rent by charging different price for differentcountries

Technical barriers to trade


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POSSIBLE INTERNATIONAL BUSINESS ACTIVITIES

International trading (an international company can be usedas intermediary to re-invoice exports and imports)

International services companies (re-invoice services throughan international company)

International construction and / engineering companies International transport/distribution companiesRoyalty companiesReal estate companies Shipping and ship management companies

Commission agents E-businessinternational business is in the Banking, Commerce & Finance

and International Trade & Relations subjects


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MODES OF INVESTMENT

Foreign Direct Investment: gives the investor a controlling Interest in aforeign company. It gives access to: - foreign markets - foreign resources - higher profits than exporting - partial ownership

Portfolio Investment: stock in a company or loans to a company or country inthe form of bonds, bills, or notes that the investor purchases.

Other Operational Definitions - Strategic Alliances

-MNCs, MNEs, TNCs, Global Company, Multi-domestic Company

External Influences on International Business

Understanding a Companys Physical and Societal EnvironmentManagers need a working knowledge of business operations, a working

Knowledge of political sciences, law, anthropology, sociology, economics, andgeography.


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MEANING OF DOMESTIC TRADE

Trading that is aimed at a single market, thefirms domestic trade, is referred to asdomestic trading. In domestic trading, the

firm faces only one set of competitive,economic, and market issue and essentiallymust deal with only one set of customers,although the company may have several

segments in this one market.


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Difference between domestic and international trade

Difference between domestic trade and foreign trade and theirpeculiar problems Trade, no doubt, implies exchange of goods

between persons, but there are marked differences betweendomestic trade and international trade. The differences and thecomplications arise therein are as follows:

DistanceThe distance involved in export of goods in external trade isgenerally greater than on the domestic trade.

Language differencesThere are differences in the languages of the nations of the world.The overseas traders should be very careful in preparing thepublicity material in the languages of the trading country

Cultural differenceA producer should have full knowledge about the market of hisproducts. For exporting goods particularly a thorough research isundertaken.


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Differences between domestic and international trade

DocumentationsIn the home trade there are few documents involved in the exchangeof goods.

PaymentsIn the internal trade, the goods are exchanged in the currencyunitof the country. In case of foreign trade currencies differ widelythroughout the world and those also vary in value.

Transport and insurance costThe transport and insurance costs are less in case of domestic trade.For the exports, on the other hand the cost of transport is high andthe insurance is complicated.

Technical differenceIn the national market the difference in the technicalspecification for goods and their requirements is not wide.

Tariff barriersIn the national trade, there are no custom duties, exchangerestrictions, fixed quotas or other tariff barriers.
http://www.blurtit.com/q573326.htmlhttp://www.blurtit.com/q573326.html


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International Business -activities that require the movement of

resources, goods, services, and skills acrossnational boundaries

all business transactions that involve two ormore countries

International Trade -the export or import ofgoods or servicesto

consumers in another country

International Investment -investment of resources in business activities

outside a firms home country

International Management -

the performance of the management functions


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International Strategy

Formulation

Why Globalize?

expand sales when domestic markets are saturated, should go

overseas to increase sales and profits

acquire resources resources may be more readily available and less

costly in other countries

diversify sources of sales and supplies different business cycles between countries

may avoid impact of price swings or shortages

avoid tariffs


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The Changing Global

Environment

In the past, managers have viewed theglobal sector as closed Each country or market was assumed to be

isolated from others

Firms did not consider global competition, exports

Todays environment is very different Managers need to view it as an open market

Organizations buy and sell around the world

Managers need to learn to compete globally


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The Changing Global

Environment

Global organizations organizations that operate and compete in more

than one country are free to establish foreign subsidiaries to

become strong world competitors

Home Country country in which the parent organization is

based Host Country country in which the parent organization makes

the investment


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Barriers to Free Trade

Free TradeBarriers

Tariffs

EconomicCommunities

ExportRestraints

Buy NationalCampaignsQuotas

Local OwnershipRequirements

Distance

CulturalDifferences


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Barriers to International Trade Trade Controls -governmental influences usually

aimed at reducing the competitiveness of importedproducts or services Tariffs: taxes levied on goods shipped internationally

Subsidies: direct payments to domestic producers

Quotas: legal restrictions on the import of goods

Free trade doctrine - predicts that if each countryagrees to specialize in the production of goods

that it can produce most efficiently, it will make the best use of global resources result in lower prices


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Distance and Cultural Barriers

Distance and Cultural barriers alsoclosed the global environment Distance closed the markets as far as some

managers were concerned

Communications could be difficult Languages and cultures were different

During the last 50 years,communications and transportationtechnology has dramatically improved Jet aircraft, fiber optics, satellites have provided

fast, secure communications and transportation

These have also reduced cultural differences


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Effects of Free Trade on

Managers

Effects of Free Trade on

Managers Declining barriershave opened greatopportunities for managers. Managers can not only sell goods and services

but also buy resources and components

globally.

Managers now face a more dynamic andexciting job due to global competition.


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Economic IntegrationFree Trade Area:all barriers to trade among member countries are

removed, so that goods and services are freely traded among themember countries

NAFTA (North American Free Trade Agreement)

Customs Union:barriers to trade among members are dismantled

while a common trade policy with respect to nonmembers is established

Common Market:no barriers to trade exists between members and a

common external trade policy is in force; also, factors of production,

such as labor, capital, and technology move freely between member

countries

European Union (EU)

SAARC

ASEAN

Gl b l T k E i tGl b l T k E i


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Global Task EnvironmentGlobal Task Environment

Suppliers

Distributors

Customers

CompetitorsForces YieldingOpportunitiesand Threats

S li & Di t ib tS

&


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Suppliers & DistributorsSuppliers & Distributors

Managers buy products from global suppliers or

make items abroad and supply themselves Key is to keep quality high and costs low

Global outsourcing:firms buy inputs from

throughout the world GM might build engines in Mexico, transmissions in

Korea, and seats in the U.S.

Finished goods become global products

Distributors:each country often has a uniquesystem of distribution Managers must identify all the issues

C t & C titC & C

i


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Customers & CompetitorsCustomers & Competitors

Formerly distinct national markets aremerging into a huge global market True for both consumer and business goods

Creates large opportunities

Still, managers often must customizeproducts to fit the culture

McDonald's sells a local soft drink in Brazil

Global competitors present new threats

Increases competition abroad as well as at


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Forces in the Global General

EnvironmentForces in the Global General

EnvironmentPolitical &

Legal Systems

Economicsystem

SocioculturalSystem

Forces yieldingOpportunities

and threats

Figure 4.3

P liti l/L l E i t


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Political/Legal Environment Different legal systems: common law or civil

law Representative democracies: such as the U.S., Britain, and

Canada

Citizens elect leaders who make decision for electorate.

Usually has a number of safeguards such as freedom ofexpression, a fair court system, regular elections, and limited

terms for officials Well-defined legal system and economic freedom

Totalitarian regimes: a single political party or personmonopolize power in a country

Typically do not recognize or permit opposition

Do not have most safeguards found in a democracy

Difficult to do business with given the lack of economicfreedom

Human rights issues also cause managers to avoid dealingwith these countries

E i E i t


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Economic Environment

Economic Systems

Market Economy production and prices are dictated by supply and

demand

production of goods and services is privately owned

competitive markets

strong currencies

institutional support

well-functioning infrastructures investment opportunities for individuals

social welfare, consumer-directed,

administratively guided

E i E i t


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Economic Environment

Command Economy

government sets goals and determines the price andquantity of what is produced

most command economies are moving away fromthe command economic system

Mixed Economy certain economic sectors controlled by private

business, while others are government controlled

many mixed countries are moving toward a freeenterprise system

Key Economic Issues (and indicators) economic growth, inflation, quality of life, GDP

exchange rates

R t T dR t T d


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Recent TrendsRecent Trends

Current shift away from totalitarian dictatorstoward democratic regimes very dramatic example seen in the collapse of the former

Soviet Republic

also very pronounced in Latin America and Africa

With this shift, has come a strong movementtoward free market systems

this provides great opportunities to business managerson a global level

many businesses are investing millions in formertotalitarian countries to seize these opportunities

S i lt l FS i lt l F


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Sociocultural ForcesSociocultural Forces National culture:includes the values,

norms, knowledge, beliefs, and other

practices that unite a country. Values:abstract ideas about what a societybelieves to be good, desirable and beautiful. Provides attitudes for democracy, truth,

appropriate roles for men, and women.

Usually not static but very slow to change. Norms:social rules prescribing behavior in

a given situation. Folkways:routine social conventions including

dress codes and manners. Mores:norms that are central to functioning of

society - much more significant than folkways. examples of mores include theft, adultery, and are often

enacted into law

I t ti l St t


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FormulationHow Do Organizations Globalize?

Stage One: Passive Response

Importing: firm makes products and sells abroad

Exporting: to foreign countries

Stage Two: Initial (Overt) Entry

Hiring foreign representation

Contracting with foreign manufacturers

Stage Three:Fully-established operations

Licensing/FranchisingForeign Direct Investment (FDI)

- Joint Ventures

- Foreign Subsidiary

I t ti l St t


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Formulation

Exporting:selling abroad, either directly totarget customers or indirectly by retainingforeign sales agents and distributors

Importing:selling other countries productsin the home country, either directly to targetcustomers or indirectlyAdv: quick and relatively inexpensive

test the waters and learn aboutcustomers

Disadv: high transportation costs

tariffs and quotas

danger of poor intermediary selection


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Formulation Licensing:an arrangement where a firm

(licensor) grants a foreign firm the right to useintangible (intellectual) property such as

patents, copyrights, manufacturing processes,or trade names for a specified period of time,usually in return for a percentage of theearnings, called royalty

Adv: small or insignificant investment

Disadv: loss of control


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Formulation Franchising:an arrangement where a

parent company (franchisor) grants a

foreign firm (franchisee) the right to do

business in a prescribed manner. Usually

involves a longer time commitment by both

parties than required under licensing

agreementsAdv: small or insignificant investment

Disadv: loss of quality control


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Formulation Foreign Direct Investment:

operations in one country that are controlled

by entities in a foreign countries

acquiring control by owning more than 50 percent

of the operation

turns a firm into a multinational enterprise

Foreign Direct Investment


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Foreign Direct Investment

Strategic Alliance:

a cooperative agreement between potential or actual

competitors

an agreement between firms that is of strategic importance to

one or both firms; competitive viability Joint Venture:

the participation of two or more companies jointly in an

enterprise in which each party contributes assets, owns the

entity to some degree, and shares risk

Wholly Owned Foreign Subsidiaries

provide for tightest controls by foreign firms

very costly but can yield high returns

International ExpansionInternational Exp

ansion


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International ExpansionInternational Expansion

Importing

Exporting

Licensing

FranchisingJoint Ventures

Strat. Alliances

Wholly-

owned For.

Subsidiary

Low High

Level of Foreign involvement and investmentneeded by a global organization

Figure 4.6


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The Global Manager

H o mM a r kO r i e n

E t h n o

I n d i vF o r eM a r k

P o l y c

I n t e gW o r l dM a r k

G e o c

M a n a g e r i a

International Managerial Attitudes


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International Managerial Attitudes Ethnocentric: the belief that the home (originating)

countrys management style is superior to the host

(recipient) countrys management style companies with this type of management may do business in foreigncountries but their subsidiaries will be managed by home countrypersonnel with home management style

Geocentric: (sometimes called regiocentric

management) tends to see the whole world as asingle marketplace and as such employ a mix ofmanagement styles of the home country and hostcountry managers and other key personnel are selected based on merit

without regard to their country of origin

Polycentric: the philosophy that the host countrysmanagement style is superior to the home countrysstyle will employ host country managers to run each subsidiary

introduction of international business

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