International Business

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International Business Chapter 1 Globalization and International Business
Globalization refers to the broadening set of interdependent relationships among people from different parts of a world that happens to be divided into nations. The term sometimes refers to the integration of world economies through the reduction of barriers to the movement of trade, capital, technology, and people.

International Business(IB)
International Business consists of all commercial transactions between two more countries. • • The goal of private business is to make profit. Government business may or may not be motivated by profit.

Reasons/Factors in increased Globalization:
1. Increase in and expansion of technology. 2. Liberalization of cross-border trade and resource movements. 3. Development of services that support IB. 4. Growing consumer pressures. 5. Increased global competition 6. Changing political situations 7. Expanded cross-national cooperation.

What’s wrong with globalization?
• • • Threats to national sovereignty Threats to economic sovereignty-Economic sovereignty increases environmental degradation. Growing income inequality

Why Companies engage in IB?
Three major operating objectives: • Expanding Sales- A companies sales depend on two factors: (1) Consumer interest in its products or services and (2) Consumer Willingness and ability to buy them. For any product or service, there are more potential consumers and sales in the world than in any single country. So increased sales are a major motive for a companies expansion into international markets, and in fact, many of the world’s largest companies-including Volkswagon (Germany), Ericsson (Sweden), IBM (USA) etc derive more than half their sales outside their home countries. • Acquiring resources- Producers and distributors seek out products, services, resources, and components from foreign countries. Sometimes, it’s because domestic supplies are inadequate (as the case with beef shipped to Japan). • Diversify sources of sales and supplies—takes advantage of business cycle differences among countries • Minimizing Risk-International operations may reduce operating risk by:    Smoothing sales and profits Preventing competitors from gaining advantages Diversification reduces loss e.g. Nestle

By obtaining supplies of products or components from different countries, companies may be able to soften the impact of price swings or shortages in any country.

Modes of Operations in IB
• Merchandise/visible exports and imports Merchandise exports are tangible (visible) products or goods that are sent out of a country. On the contrary, Merchandise imports are tangible (visible) products or goods that are brought into the country. When an Indonesian plant sends aesthetic shoes to the UAE, the shoes are exports for Indonesia and imports for UAE. For most countries, the export and import of goods are the major sources of international revenues and expenditures. • Service Exports and Imports Note that the terms export and import often apply only to merchandise, not to services. When we refer to products that generate non-product international earning, we use the terms service exports and service imports. The company or individual that provides the service and receives payments makes a service export; the company or individual that receives the service and pays for it makes a service import. Service exports and imports usually take the form of: o Tourism and transportation-Air lines services o Service performance-Foreign Consultants services, Foreign Banks, Insurance, engineering and management services. o Asset use – When one company allows another to use its assets, such as trademarks, patents, copyrights, or expertise, under contracts known as

licensing agreements, they receive earnings called royalties e.g. licensing KFC, Pizza hut, Franchising(using name and logo) etc.

Investments Dividends and interest paid on foreign investments are also considered service exports and imports because they represent the use of assets (capital). The investments themselves, however, are treated as different form of service exports and imports. Note first of all that foreign investment means ownership of foreign property in exchange for a financial return, such as interest and dividends. Two forms of foreign investments: o Foreign Direct Investment (FDI)-When the investor takes the controlling interest in a foreign company. If a foreign investor holds a minority stake and the remaining ownership is widely dispersed, no other owner may be able to counter the decisions of the foreign investor. o Portfolio Investment-A portfolio investment is a non-controlling interest in a company or ownership of a loan made to another party. Two forms: Stock in a company or loans to a company (or country) in the form of bonds, bills, or notes purchased by the investor. They are used primarily for short term financial gains.

International Business Chapter 2 Cultural Environments Facing Business
 Culture represents the specific learned norms of a society, based on attitudes, values and beliefs.  Cultures consist of people who share attitudes, values and beliefs.  Values are ideas, beliefs, and customs to which people are emotionally attached. Example: Islamic law prohibits use of alcohol  Attitudes are positive or negative evaluations, feelings, and tendencies that individuals harbor toward objects or concepts. Example: Being on time is important to some cultures while it is not important in other cultures  Manners: Appropriate ways of behaving, speaking and dressing in a culture.  Customs: Habits or ways of behaving in specific circumstances that are passed down through generations in culture Factors of Cultures affecting Business: • • • • Cultural Awareness Identification and Dynamics of Cultures Behavioral Practices affecting Business Strategies for dealing with cultural differences

Identification and Dynamics of Cultures The Nation as a point of reference: Nation expresses a ‘we’ feeling and foreigners are considered as ‘they’. Nation waves a common feeling on some issues and shares a common legal system. Similar group of people may react in the same manner in different countries. Cultural formation and dynamics: Culture transmitted through the persons of interaction (parent to child, teacher to pupil). Change may come through choice or imposition (often called cultural imperialism). Language as a cultural stabilizer: Culture spreads easily for same language. Languages spoken in small geographical area prohibits businesses to spread (Africa). Translation for commercial purposes is costly and somewhere it is a regulatory binding. Religion as a cultural stabilizer: Religion generally lies in the core of the heart of the people thus; this belief is very soft and sensitive. Holiday, food, interest payment, hostility have impacts from religious side Behavioral Practices Affecting Business Social stratification system: A reflection of class and status in the society creates impact on business practices. Ranking in the social stratification determined by ascribed (affiliations determined by birth i.e. Gender, family, age, caste, and ethnic, racial or national origin) and acquired (affiliations not determined by birth i.e. Religion, political affiliations, and professional and other associations) group membership.  Performance Orientation Based on Competencies-USA Based on Seniority-Japan  Gender based groups Country-to-country attitude vary toward-Male and female roles, respect for age, family ties etc. e.g. India and China-Male  Age based groups  Family based groups e.g. Italy, China, Japan  Occupation  Open and Closed Societies

Work Motivation: Employees motivational level influences economic development positively. International business enterprises are more interested to higher the motivational level as higher productivity reduces cost.  Materialism and leisure  Expectation of success and reward  Assertiveness  Need hierarchy Relationship preference: Extent of relationship gap in the social norms influence management style and marketing behavior.  Power Distance -relationship between superiors and subordinates Highest in Morocco, Lowest in Netherlands  Individualism Versus Collectivism-United States is clearly different from Japan China is clearly different from Mexico Risk-Taking Behavior: Level of risk taking behavior of a particular culture explains how people feel and control their destinies.  Ease of handling uncertainties- UK as risk taking  Degree of trust among people-Highest in Norway, Lowest in Brazil  Future Orientation (LT-Switzerland, Canada; ST-Russia, Poland)  Attitudes of self-determination and fatalism Information and task processing: People from different culture perceive, obtain, and process information in different manner.  Perception of Cues  Obtaining information  Information Processing Communications  Spoken and written language  Distance  Time and Punctuality

 Body language

Chapter 3 Political and Legal Environments Facing Business
Individualism refers to general orientation within a society concerning the primacy of the rights and the role of the individual. • • • Political officials and agencies have a limited role in society. Make and apply regulations to correct market inefficiencies: accessibility to information, promoting fair and just competition. Government is detached from and independent of the day-to-day practices of business in an individualistic society.

Collectivism refers to general orientation within a society concerning the primacy of the rights and the role of the community. • • • Government officials should intervene in the structure of industries, conduct of companies, and actions of managers to ensure they benefit society. Setting up formal and informal partnerships with the business community to develop successful companies. Governments are highly connected to and interdependent with business.

Political ideology
A Political Ideology is a system of ideas that expresses the goals, theories, and aims that constitute a sociopolitical program • Pluralist society—different ideologies coexist because there is no one ideology accepted by all – difficult to understand the political environment in a pluralist society • Ultimate test of any political system is its ability to hold a society together despite pressures from different ideologies • Ideologies also help bring countries together

The impact of ideological differences on national boundaries • Differences in political ideology have affected boundaries in Europe • When operating in a foreign country, must understand the potential sources of political tension and instability

—involves wide participation by citizens in the decision-making process • Freedom of opinion, expression, press, and freedom to organize • Election of political representatives • Limited term of elected officials • Independent and fair court system • Nonpolitical bureaucracy and defense infrastructure • Accessibility to the decision-making process Democratic governments differ • Presidential versus parliamentary • Number of important political parties • Amount of citizen participation in decision making • Fragility and stability of new democracies Democracy believed to be the best form of government

Totalitarianism • A political system in which a single agent, whether an individual, group, or party, monopolizes all political power. • Aims to subordinate all aspects of the day-to-day life of people to the power of the state. • Merging the concepts of the state and the people.

• •

Order is often imposed through military power. Neither recognizes nor permits opposition. Tools used include: violence, persecution, propaganda, censorship.

 Authoritarianism: a political system that aims to rule completely all affairs of all citizens.  Fascism: to control people’s minds and souls through the supremacy of the state.  Secular Totalitarianism: using the power of the state or the army to enforce control of all aspects of the business environment. Communism and total government ownership and control of the factors of production.  Theocratic Totalitarianism: religious leaders are the political leaders, Political Risks for International Business  Political Risk: The chance that political decisions, events, or conditions in a country will affect the business environment in ways that lead investors: To lose some or all of the value of their investment, or Be forced to accept a lower than expected rate of return.

Sources of Political Risk  Systemic: Political risk created by shifts in public policy, such as a new political leadership that may adopt a different approach than its predecessor.  Procedural: Political actions can sometimes create frictions that interfere with the procedural transactions between units. (Government corruption, labor disputes, a partisan judicial system)  Distributive: Political actions that aim to claim a greater share of rewards.  Catastrophic: Random political developments.

Kinds of Legal Systems
Common Law A common law system is based on tradition, judge-made precedent, andusage and assigns a preeminent position existing case law as a guide dispute resolution.Judicial officials refer to statutory codes and legislation, but only after they’ve alsoconsidered the rules of the court, custom, judicial reasoning, prior court decisions, and principles of equity. The Anglo-American common law system prevails in countries suchas Canada, the United States, England, New Zealand, and Australia.

Civil Law A civil law system is based on a systematic and extensive codification of laws. Such systems often charge political officials —not government-employed judges— with responsibility for specifying accessible and written codes of law that apply to allcitizens. Rather than create law, therefore, judges apply existing legal and proceduralcodes to resolve disputes. More than 70 countries, including Germany, France, and Japan,employ civil law systems. Theocratic Law A theocratic law system relies on religious and spiritual principles todefine the legal environment. Ultimate legal authority is vested in religious leaders, whoapply religious law to govern social transactions. The most prevalent theocratic system,Islamic law, or Shari’a, is based on a variety of sources: the Koran—the sacred text of Islam; the Sunnah—decisions and sayings of the Prophet Muhammad; the writings of Islamic scholars, who derive rules by analogy from the principles established in theKoran and the Sunnah; and the consensus of legal communities in Muslim countries. Customary Law A customary law system is anchored in the wisdom of dailyexperience or, for those who are more intellectually inclined, certain spiritual or philosophical traditions. Few countries in the world today operate under a legal system that is wholly customary, but in many countries with mixed legal systems, it sometimes plays a significant role in evaluating matters of personal conduct.

 Common law systems (tradition/precedent) • United States • United Kingdom  Civil law: based on a systematic and extensive codification of laws. Political officials prepare a written collection of laws. Judges apply existing laws instead of creating them. • Germany • France • Japan  Theocratic law (based on religious principles and rules) Islamic Law that is based on the Qur’an, the practices of the prophet, the writings of scholars, and consensus of the community. • Sudan • Pakistan   A Customary Law System: follows the wisdom of daily experience. A Mixed Legal System.

Legal Issues in International Business Managers look at legal issues from two perspectives:  Operational (Procedural) Concerns: How do legal regulations impact day-today operations?  starting a business,  hiring and firing,  entering and enforcing contracts,  closing down the business  Strategic Concerns: How do legal regulations affect companies’ long-term competitiveness?  Product safety and liability  Marketplace behaviour  Product origin

 Legal jurisdiction  Arbitration Intellectual Property Rights (IPRs) • Now, countries are competing on the strength of their brainpower to create might, prestige, and wealth. • The output of this brainpower is called intellectual property – books, designs,brand names, software. • • Problems occur because IP is hard to conceive but easy to copy. (Piracy) IPRs refer to the right to control and derive the benefits from writing (copyrights), inventions (patents), processes (trade secrets),and identifiers (trademarks).  Legal problems arise because countries because not all countries formally support the various conventions that protect IPRs.  The Paris Convention for the Protection of Industrial Property  The Berne Convention for the Protection of Literary and Artisitic Works.  The Trade Related Aspects of Intellectual Property Rights (TRIPS) code of the WTO.

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