International Business Management
Content
UNIT I INTERNATIONAL BUSINESS Meaning International business is a term used to collectively describe all commercial transactions (private and governmental, sales, investments, logistics, and transportation) that take place between two or more regions, countries and nations beyond their political boundary. Usually, private companies undertake such transactions for profit; governments undertake them for profit and for political reasons. It refers to all those business activities which involve cross border transactions of goods, services, resources between two or more nations. Transaction of economic resources include capital, skills, people etc. for international production of physical goods and services such as finance, banking, insurance, construction etc. International Business conducts business transactions all over the world. These transactions include the transfer of goods, services, technology, managerial knowledge, and capital to other countries. International business involves exports and imports. International Business is also known, called or referred as a Global Business or an International Marketing. Definition
The exchange of goods and services among individuals and businesses in multiple
countries.
A specific entity, such as a multinational corporation or international business company
that engages in business among multiple countries. An international business has many options for doing business, it includes, 1. 2. 3. 4. 5. Exporting goods and services. Giving license to produce goods in the host country. Starting a joint venture with a company. Opening a branch for producing & distributing goods in the host country. Providing managerial services to companies in the host country.
1
Features of International Business The nature and characteristics or features of international business are: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. Intergration of economies : International business integrates (combines) the economies of many countries. This is because it uses finance from one country, labour 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 and 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 foreign capital and technology. They get rapid industrial development. They get more employment opportunities. All this results in 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 favourable position because they
2
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. Special role of science and technology : International business gives a lot of importance to science and technology. Science and Technology 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. International restrictions : International business faces many restrictions on the inflow and outflow of capital, technology and goods. Many governments do not allow international businesses to enter their countries. They have many trade blocks, tariff barriers, foreign exchange restrictions, etc. All this is harmful to international business. 8. Sensitive nature : The international business is very sensitive in nature. Any changes in the economic policies, technology, political environment, etc. has a huge impact on it. Therefore, 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. INTERNATIONALIZING BUSINESS Definition The process leading to identifying and entering international markets or a process of increasing involvement of enterprises in international markets. In real terms: Usually implemented by:
•
Firms acting alone – set up subsidiary (sales & production) by buying an existing company or creating a new one. Firms acting with others – establish strategic alliance with one or more partners (local or internatonal).
•
Advantages of Internationalization
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Benefits of going International
Spreading business risk. Opportunity to exploit an existing competitive edge in new markets. Expansion of brand awareness to new audiences. Increased revenue generation. Possibility of accessing new technologies / information. Business can be conducted via the internet thus shortening the communication channels between customers and markets.
Disadvantages of Internationalization Factors that could adversely affect overseas operating activities:
Cultural and language barriers. Exchange rate fluctuations. Religious beliefs. Government regulations / policy on profit repatriation. Political instability. Economic downturn.
FACTORS CAUSING GLOBALIZATION OF BUSINESS Meaning Business globalization means companies and businesses have begun their trade and production on international arena. Businesses are shifting their boundaries from domestic to international ones. Physical and societal factors
• • • •
Political policies and legal practices Cultural factors Economic forces Geographical influences
Competitive factors
• • •
Major advantage in price, marketing, innovation, or other factors. Number and comparative capabilities of competitors Competitive differences by country
4
•
Local taxes
The main and important causes for the recent business globalization are: Increase in global competition. Rapid increase and expansion of technology. Liberalization of cross border movement and Development of supporting services. The pressure of increased foreign competition can force a company to expand its business into international market. Now day’s companies can respond rapidly to many foreign sales opportunities. They can exchange production quickly among countries if they are experienced in foreign market and because they can transport goods efficiently from one place to other. The pace of the technology advances has accelerated to greater heights and the knowledge of product and services is available more quickly and due to communication and transportation technology. By increasing the demand of new products and services, Technology has tremendous impact on International business as the demand increases and so do the number of International business transactions. There has been growth in globalization in recent decades due to the following eight factors:
• • • • • • • •
Technology is expanding, especially in transportation and communications. Governments are removing international business restrictions. Institutions provide services to ease the conduct of international business. Consumers know about and want foreign goods and services. Competition has become more global. Political relationships have improved among some major economic powers. Countries cooperate more on transnational issues. Cross-national cooperation and agreements.
INTERNATIONAL BUSINESS ENVIRONMENT International business environment operates in different countries, varied cultures, and under disparate political- legal environments. The environment of international business is regarded as the sum total of all the external forces working upon the firm as it goes about its affairs in foreign and domestic markets. Need for International Business • More and more firms around the world are going global, including:
5
– – – • – –
– –
Manufacturing firms Service companies (i.e. banks, insurance, consulting firms) Art, film, and music companies causes the flow of ideas, services, and capital across the world offers consumers new choices permits the acquisition of a wider variety of products facilitates the mobility of labor, capital, and technology provides challenging employment opportunities reallocates resources, makes preferential choices, and shifts activities to a global level.
International business:
–
–
International Business Meaning International business consists of transactions that are devised and carried out across national borders to satisfy the objectives of individuals, companies, and organizations. Global Business Environment Culture Environment Culture is an integrated system of learned behavior patterns that are characteristic of the members of any given society. Elements of Social and Culture Language (verbal and nonverbal) Religion Values and Attitudes Manners and Customs Material Elements Education Social Institutions
6
Political Environment The Home Country Perspective Major areas of governmental activity that are of concern to the international business manager: – – – – Embargoes and Sanctions Export Controls Regulation of International Business Behavior
Host Country Political and Legal Environment Political Action and Risk - Varies widely from country to country. Three Types of Political Risk o Ownership Risk Exposes property and life o Operating Risk Interference with the ongoing operations of a firm o Transfer Risk Limitations on the outflow of funds Political Risk May Involve • • • Confiscation – –
–
The government takeover of a firm without compensation to the owners. A form of government takeover in which the firm’s owners are compensated. The government demands transfer of ownership and management responsibility.
Expropriation Domestication
Economic Risk o Less dangerous, but more common Economic Environment
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• • • •
Economic Size Economic Systems Key Macroeconomic Indicators Economies in Transition
COUNTRY ATTRACTIVENESS Two broad implications for IB Political, economic, and legal systems of a country raise important ethical issues that
have implications for the practice of international business.
The political, economic, and legal environment of a country clearly influences the
attractiveness of that country as a market and/or investment site. Country attractiveness analysis 1. A country attractiveness assessment is based on two dimensions • Market and industry opportunities. •Country risks (many organizations publish country assessment results based on various economic / political / social factors). 2. Market opportunities Market opportunities assessment measures the potential demand in the country for a firm’s products or services based on: •Market size •Growth •Quality of demand. 3. Industry opportunities
8
Industry opportunities assessment determines profitability potential presence in a country given the following factors: •Quality of industry competitive structure •Resource availability 4. Country risk • Political risks
of a company’s
Political risks are probable disruption so wing to internal or external events or regulations resulting from political action of governments or societal crisis and unrest. • Economic risks Economic risks expose business performance to the extent that the economic business drivers can vary and therefore put profitability at stake. • Competitive risks Competitive risks are related to non-economic distortion of the competitive context to wing to cartels and networks as well as corrupt practices. The competitive battlefield is not even and investors who base their competitive advantage on product quality and economics are at disadvantage. • Operational risks Operational risks are those that directly affect the bottom line, either because
government regulations and bureaucracies add costly taxation or constraints to foreign investors or because the infrastructure is not reliable. Figure of Country Attractiveness
Benefits Size of Economy Likely Economic Growth Corruption
Costs
9
Lack of infrastructure Legal Costs
Overall Attractivenes s
Risks Political –Social unrest/Anti business trend Economic – Economic mismanagement Legal – Failure to safeguard property rights PROTECTION VS LIBERALIZATION OF GLOBAL BUSINESS ENVIRONMENT Sustainable development, international law and environmental protection In terms of environmental protection, the most potentially far-reaching aspect of sustainable development is that for the first time it makes a states management of its own domestic environment a matter of international concern in a systematic way (Bernie and Boyle 2002). Despite this however, the various social, political and economic value judgements in determining what is sustainable has made it difficult for an international court to review national legislation and conclude that it falls short of a standard of ‘sustainable development’ (Bernie and Boyle 2002). While international law may not require development to be sustainable, it does require that decisions made about economic development be the outcome of a process that promotes
10
sustainable development. In order to achieve sustainable development, states are encouraged to implement the main elements employed by the Rio Declaration and other instruments for facilitating sustainable development. The conducting of Environmental Impact Assessments (EIAs), public participations, integrating of development and environmental considerations and the inclusion of inter- and intra-generational equity in decision-making are some of the elements required to achieve sustainable development.
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The exchange of goods and services among individuals and businesses in multiple
countries.
A specific entity, such as a multinational corporation or international business company
that engages in business among multiple countries. An international business has many options for doing business, it includes, 1. 2. 3. 4. 5. Exporting goods and services. Giving license to produce goods in the host country. Starting a joint venture with a company. Opening a branch for producing & distributing goods in the host country. Providing managerial services to companies in the host country.
1
Features of International Business The nature and characteristics or features of international business are: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. Intergration of economies : International business integrates (combines) the economies of many countries. This is because it uses finance from one country, labour 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 and 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 foreign capital and technology. They get rapid industrial development. They get more employment opportunities. All this results in 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 favourable position because they
2
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. Special role of science and technology : International business gives a lot of importance to science and technology. Science and Technology 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. International restrictions : International business faces many restrictions on the inflow and outflow of capital, technology and goods. Many governments do not allow international businesses to enter their countries. They have many trade blocks, tariff barriers, foreign exchange restrictions, etc. All this is harmful to international business. 8. Sensitive nature : The international business is very sensitive in nature. Any changes in the economic policies, technology, political environment, etc. has a huge impact on it. Therefore, 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. INTERNATIONALIZING BUSINESS Definition The process leading to identifying and entering international markets or a process of increasing involvement of enterprises in international markets. In real terms: Usually implemented by:
•
Firms acting alone – set up subsidiary (sales & production) by buying an existing company or creating a new one. Firms acting with others – establish strategic alliance with one or more partners (local or internatonal).
•
Advantages of Internationalization
3
Benefits of going International
Spreading business risk. Opportunity to exploit an existing competitive edge in new markets. Expansion of brand awareness to new audiences. Increased revenue generation. Possibility of accessing new technologies / information. Business can be conducted via the internet thus shortening the communication channels between customers and markets.
Disadvantages of Internationalization Factors that could adversely affect overseas operating activities:
Cultural and language barriers. Exchange rate fluctuations. Religious beliefs. Government regulations / policy on profit repatriation. Political instability. Economic downturn.
FACTORS CAUSING GLOBALIZATION OF BUSINESS Meaning Business globalization means companies and businesses have begun their trade and production on international arena. Businesses are shifting their boundaries from domestic to international ones. Physical and societal factors
• • • •
Political policies and legal practices Cultural factors Economic forces Geographical influences
Competitive factors
• • •
Major advantage in price, marketing, innovation, or other factors. Number and comparative capabilities of competitors Competitive differences by country
4
•
Local taxes
The main and important causes for the recent business globalization are: Increase in global competition. Rapid increase and expansion of technology. Liberalization of cross border movement and Development of supporting services. The pressure of increased foreign competition can force a company to expand its business into international market. Now day’s companies can respond rapidly to many foreign sales opportunities. They can exchange production quickly among countries if they are experienced in foreign market and because they can transport goods efficiently from one place to other. The pace of the technology advances has accelerated to greater heights and the knowledge of product and services is available more quickly and due to communication and transportation technology. By increasing the demand of new products and services, Technology has tremendous impact on International business as the demand increases and so do the number of International business transactions. There has been growth in globalization in recent decades due to the following eight factors:
• • • • • • • •
Technology is expanding, especially in transportation and communications. Governments are removing international business restrictions. Institutions provide services to ease the conduct of international business. Consumers know about and want foreign goods and services. Competition has become more global. Political relationships have improved among some major economic powers. Countries cooperate more on transnational issues. Cross-national cooperation and agreements.
INTERNATIONAL BUSINESS ENVIRONMENT International business environment operates in different countries, varied cultures, and under disparate political- legal environments. The environment of international business is regarded as the sum total of all the external forces working upon the firm as it goes about its affairs in foreign and domestic markets. Need for International Business • More and more firms around the world are going global, including:
5
– – – • – –
– –
Manufacturing firms Service companies (i.e. banks, insurance, consulting firms) Art, film, and music companies causes the flow of ideas, services, and capital across the world offers consumers new choices permits the acquisition of a wider variety of products facilitates the mobility of labor, capital, and technology provides challenging employment opportunities reallocates resources, makes preferential choices, and shifts activities to a global level.
International business:
–
–
International Business Meaning International business consists of transactions that are devised and carried out across national borders to satisfy the objectives of individuals, companies, and organizations. Global Business Environment Culture Environment Culture is an integrated system of learned behavior patterns that are characteristic of the members of any given society. Elements of Social and Culture Language (verbal and nonverbal) Religion Values and Attitudes Manners and Customs Material Elements Education Social Institutions
6
Political Environment The Home Country Perspective Major areas of governmental activity that are of concern to the international business manager: – – – – Embargoes and Sanctions Export Controls Regulation of International Business Behavior
Host Country Political and Legal Environment Political Action and Risk - Varies widely from country to country. Three Types of Political Risk o Ownership Risk Exposes property and life o Operating Risk Interference with the ongoing operations of a firm o Transfer Risk Limitations on the outflow of funds Political Risk May Involve • • • Confiscation – –
–
The government takeover of a firm without compensation to the owners. A form of government takeover in which the firm’s owners are compensated. The government demands transfer of ownership and management responsibility.
Expropriation Domestication
Economic Risk o Less dangerous, but more common Economic Environment
7
• • • •
Economic Size Economic Systems Key Macroeconomic Indicators Economies in Transition
COUNTRY ATTRACTIVENESS Two broad implications for IB Political, economic, and legal systems of a country raise important ethical issues that
have implications for the practice of international business.
The political, economic, and legal environment of a country clearly influences the
attractiveness of that country as a market and/or investment site. Country attractiveness analysis 1. A country attractiveness assessment is based on two dimensions • Market and industry opportunities. •Country risks (many organizations publish country assessment results based on various economic / political / social factors). 2. Market opportunities Market opportunities assessment measures the potential demand in the country for a firm’s products or services based on: •Market size •Growth •Quality of demand. 3. Industry opportunities
8
Industry opportunities assessment determines profitability potential presence in a country given the following factors: •Quality of industry competitive structure •Resource availability 4. Country risk • Political risks
of a company’s
Political risks are probable disruption so wing to internal or external events or regulations resulting from political action of governments or societal crisis and unrest. • Economic risks Economic risks expose business performance to the extent that the economic business drivers can vary and therefore put profitability at stake. • Competitive risks Competitive risks are related to non-economic distortion of the competitive context to wing to cartels and networks as well as corrupt practices. The competitive battlefield is not even and investors who base their competitive advantage on product quality and economics are at disadvantage. • Operational risks Operational risks are those that directly affect the bottom line, either because
government regulations and bureaucracies add costly taxation or constraints to foreign investors or because the infrastructure is not reliable. Figure of Country Attractiveness
Benefits Size of Economy Likely Economic Growth Corruption
Costs
9
Lack of infrastructure Legal Costs
Overall Attractivenes s
Risks Political –Social unrest/Anti business trend Economic – Economic mismanagement Legal – Failure to safeguard property rights PROTECTION VS LIBERALIZATION OF GLOBAL BUSINESS ENVIRONMENT Sustainable development, international law and environmental protection In terms of environmental protection, the most potentially far-reaching aspect of sustainable development is that for the first time it makes a states management of its own domestic environment a matter of international concern in a systematic way (Bernie and Boyle 2002). Despite this however, the various social, political and economic value judgements in determining what is sustainable has made it difficult for an international court to review national legislation and conclude that it falls short of a standard of ‘sustainable development’ (Bernie and Boyle 2002). While international law may not require development to be sustainable, it does require that decisions made about economic development be the outcome of a process that promotes
10
sustainable development. In order to achieve sustainable development, states are encouraged to implement the main elements employed by the Rio Declaration and other instruments for facilitating sustainable development. The conducting of Environmental Impact Assessments (EIAs), public participations, integrating of development and environmental considerations and the inclusion of inter- and intra-generational equity in decision-making are some of the elements required to achieve sustainable development.
11
