International Business

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International Business:
An Overview

Objectives
To define internal business (IB) and describe how it differs
from domestic business
To explain why companies engage in IB and why its growth
has accelerated
To introduce different modes a company can use to
accomplish its global objectives
To illustrate the role social science disciplines play in
understanding the environment of IB
To provide an overview of the primary patterns for companies’
international expansion
To describe the major countervailing forces that affect IB

Chart1: Growth in the volume of world
merchandise trade and GDP, 2005-15
Annual % change

© 2001 Prentice Hall

1-5

Introduction to International Business (IB)
IB—all commercial transactions between two or more countries
• Involves modes of business that differ from those at the
domestic level
• Foreign conditions diversity company’s external
environment

Why Companies Engage in IB
Expand sales—greater purchasing power in the world as a
whole
Acquire resources—products, services, components
• also, foreign capital, technologies, information
Diversify sources of sales and supplies—takes advantage of
business cycle differences among countries
Minimize competitive risk—prevent competitor from gaining
advantages

International Business: Operations and Influences
OPERATIONS
EXTERNAL INFLUENCES
PHYSICAL AND
SOCIETAL FACTORS
• Political policies and
legal practices
• Cultural factors
• Economic forces
• Geographical influences

COMPETITIVE
ENVIRONMENT
• Major advantage in price,
marketing, innovation, or
other factors
• Number and comparative
capabilities of competitors
• Competitive differences
by country

OBJECTIVES
• Sales expansion
• Resource acquisition
• Diversification
• Competitive risk
minimization
STRATEGY

MEANS
Modes
• Importing and exporting
• Tourism and transportation
• Licensing and franchising
• Turnkey operations
• Management contracts
• Direct and portfolio
investment

Functions

Marketin
g

Producti
on

Accounti
ng
• Finance
• Human

Overlaying
Alternatives
• Choice of
countries
• Organization
and control
mechanisms

Reasons for Growth of IB
Expansion of technology—transportation and communication
are quicker and less costly
Liberalization of cross-border movements
• Government barriers reduced because:
– desire for better access to greater variety of goods
and services
– domestic producers forced to be more competitive
– lowered trade barriers to their own exports
Development of supporting services by business and
governments to:
• Ease the flow of goods and services sold abroad
• Reduce risks of IB
Increase in global competition—firms have become more global
to maintain competitiveness

Means of Carrying Out International Operations
OPERATIONS

EXTERNAL INFLUENCES

OBJECTIVES
PHYSICAL AND
SOCIETAL FACTORS

STRATEGY

MEANS

COMPETITIVE
ENVIRONMENT

Modes
• Importing and exporting
• Tourism and transportation
• Licensing and franchising
• Turnkey operations
• Management contracts
• Direct and portfolio
investment

Overlaying
Functions
Alternatives
• Marketing • Choice of
• Production countries
• Accounting • Organization
• Finance
and control
• Human
mechanisms
resources

Modes of IB
Merchandise exports and imports—most common international
economic transaction, especially for smaller companies
• Major source of international revenue and expenditures
for most companies
Service exports and imports—nonproduct international earnings
• Tourism and transportation
• Performance of services for a fee
– turnkey operations
– management contracts
• Use of assets by others—licensing agreements
– royalties
– Franchising—franchisor:
» allows franchisee to use trademark
» provides components, technology, services

Modes of IB (cont.)
Investments—ownership of foreign property in exchange for
financial return
• Foreign direct investment—investor gains a controlling
interest in foreign company
– joint venture
– mixed venture
• Portfolio investment—noncontrolling interest

International Companies—terminology
Strategic alliance—collaborative arrangement of critical
importance to the competitive viability of one or more
partners
Multinational enterprise (MNE)—company with global approach
to foreign markets and production
Globally integrated company—integrates operations located in
different countries
Multidomestic company—foreign-country operations act fairly
independently

Physical and Societal Influences on International Business
EXTERNAL INFLUENCES
OPERATIONS
PHYSICAL AND
SOCIETAL FACTORS
• Political policies and
legal practices
• Cultural factors
• Economic forces
• Geographical influences

OBJECTIVES

STRATEGY
COMPETITIVE
ENVIRONMENT
MEANS

External Influences on IB
Physical and societal factors—must understand
• Politics that affect whether and how IB occurs
• Domestic and international law determines what
managers can do in IB
• Economics
• Geography—determine location and availability of world’s
resources
Competitive environment
• Varies by industry, company, and country
– strategies differ across companies
» e.g., importance of controlling labor costs
» e.g., influence of local and international competitors
– size of market differs across countries

Competitive Environment and International Business
EXTERNAL INFLUENCES

PHYSICAL AND
SOCIETAL FACTORS
COMPETITIVE
ENVIRONMENT
• Major advantage in price,
marketing, innovation, or
other factors
• Number and comparative
capabilities of competitors
• Competitive differences
by country

OPERATIONS

OBJECTIVES

STRATEGY

MEANS

Evolution of Strategy in International Process
Risk minimization—foreign operations viewed as risky
international commitments evolve gradually
Patterns of expansion
• Passive to active pursuit of IB opportunities
– initially wait for foreign opportunity
• External to internal handling of IB
– rely on intermediaries at first
• Limited to extensive modes of operations
– begin with importing or exporting operation
• Few to many foreign locations
• Similar to dissimilar business environments
Leapfrogging of expansion—new companies begin with
international focus
• Possible because of founder’s experience and
technological advances that help define foreign markets

The Usual Pattern of Internationalism
Impetus for
international A
business

HIGH

Active search
for opportunities

MEDIUM
Passive
response to
proposals

Moderately
similar
E
Degree of
similarity
between
foreign and
domestic
countries

Internal versus
external handling of
foreign operations
B

Very
dissimilar

LOW
Domestic
Business

Quite
similar

One

Several
Many
D

Company handles
its own foreign
operations

Other firms
handle external
contracts

Limited
foreign
functions,
usually
export/
import

Limited foreign
production and
multiple functions

Mode of

operations
Extensive C
production
abroad with
FDI and all
functions

Number of foreign countries in
which a firm does business

Countervailing Forces—complicate decision making
Global standards—export suited to many countries
– results in economies of scale
– based on global strategy
Nationally responsive practices—adjust product or service to
unique local conditions
– multidomestic approach advisable
Country versus company competitiveness
• Companies compete by seeking maximum efficiency on a
global scale
• Countries compete with each other to attain economic,
political, and social goals
– no consensus on measures of goal attainment
• Relationship unclear between country and company
performance
– high-value activities—produce high profits or
performed by well-paid employees

Countervailing Forces (cont.)
Sovereignty—freedom from external control
• Countries will cede in order to:
– gain reciprocal advantages
» bilateral or multilateral commercial treaties or
agreements
– attack problems that cannot be solved by a single
country
» problem is too big or widespread
» problem results from conditions that spill over
from another country
– deal with areas of concern that lie outside the
territory of all countries (noncoastal areas of the
ocean, outer space, Antarctica)
» technologically advanced countries believe that
companies should reap benefits from exploitation
» other countries want to share the spoils

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