International BusinessInternational Business

International Business: An International Business: An OverviewOverview

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Malaysia Annual Trade 1995-2006Malaysia Annual Trade 1995-2006

What is International BusinessWhat is International Business

All commercial transactions between two All commercial transactions between two or more countriesor more countries• PrivatePrivate• PublicPublic- Over - Over USD16.2 Trillion USD16.2 Trillion worth of goods and worth of goods and

services cross border each yearservices cross border each year International business adds significant International business adds significant

influences to typical domestic operationsinfluences to typical domestic operations• PhysicalPhysical• SocietalSocietal• CompetitiveCompetitive

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International BusinessInternational Business

Why Engage in International Why Engage in International BusinessBusiness

Expand sales (market motives)Expand sales (market motives)• Volkswagen (Germany)Volkswagen (Germany)• Ericsson (Sweden)Ericsson (Sweden)• IBM (United States)IBM (United States)

Acquire resources (economic motives)Acquire resources (economic motives)• Better components, services, productsBetter components, services, products• Foreign capitalForeign capital• TechnologiesTechnologies• informationinformation

Minimize risk (strategic motives)Minimize risk (strategic motives)• Take advantage of the business cycle for Take advantage of the business cycle for

products/servicesproducts/services• Diversify among international marketsDiversify among international markets

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Reasons for Growth in International Reasons for Growth in International BusinessBusiness

Rapid increase in and expansion of Rapid increase in and expansion of technologytechnology

Transportation is quicker while costs are Transportation is quicker while costs are lowerlower

Communication enables control from afarCommunication enables control from afar Liberal government policies on trade and Liberal government policies on trade and

resources/ liberalization of cross-border resources/ liberalization of cross-border movementmovement

Development of institutions that support Development of institutions that support international tradeinternational trade

Consumer pressuresConsumer pressures Increased global competitionIncreased global competition

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Examples of Reduction inExamples of Reduction inTrade BarriersTrade Barriers

General Agreement on Tariffs and TradeGeneral Agreement on Tariffs and Tradewww.gatt.orgwww.gatt.org

World Trade Organization (WTO)World Trade Organization (WTO)www.wto.orgwww.wto.org

North America Free Trade AgreementNorth America Free Trade Agreement www.nafta.org www.nafta.org

European Union (EU)European Union (EU)europa.eu.inteuropa.eu.int

Asia Pacific Economic CooperationAsia Pacific Economic Cooperationwww.apec.orgwww.apec.org

Average Tariff Rates on Average Tariff Rates on Manufactured ProductsManufactured Products

19131913 19501950 19901990 20022002

FranceFrance 21 %21 % 18 %18 % 5.9 %5.9 % 4.0 %4.0 %

GermanyGermany 20 %20 % 26 %26 % 5.9 %5.9 % 4.0 %4.0 %

ItalyItaly 18 %18 % 25 %25 % 5.9 %5.9 % 4.0 %4.0 %

JapanJapan 30 %30 % ---- 5.3 %5.3 % 3.8 %3.8 %

HollandHolland 5 %5 % 1 %1 % 5.9 %5.9 % 4.0 %4.0 %

SwedenSweden 20 %20 % 9 %9 % 4.4 %4.4 % 4.0 %4.0 %

Great Great BritainBritain

---- %% 5.9 %5.9 % 4.0 %4.0 %

United United StatesStates

44 %44 % 14 %14 % 4.8 %4.8 % 4.0 %4.0 %

Examples of Technological Examples of Technological InnovationInnovation

Internet, Intranet, and ExtranetInternet, Intranet, and Extranet• Use of World Wide Web, Private NetworksUse of World Wide Web, Private Networks

on Internal company Web siteson Internal company Web sites

Activities Occurring After The Production Activities Occurring After The Production ProcessProcess• To bypass intermediaries like wholesalers and To bypass intermediaries like wholesalers and

retailers, companies can enter global markets, cut retailers, companies can enter global markets, cut postproduction costs, and pass savings on to postproduction costs, and pass savings on to customers.customers.

Advancement in TechnologyAdvancement in Technology• Advances in transportation methods are helping to Advances in transportation methods are helping to

globalize both markets and production activities. globalize both markets and production activities. • Advancements in the shipping industry are facilitating Advancements in the shipping industry are facilitating

globalization by making shipping more efficient and globalization by making shipping more efficient and dependable.dependable.

Internet Usage GrowthInternet Usage Growth

Figure 1.3: Internet Users per 1000 People, 1990-2003

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1000 p

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Japan United States European Monetary Union World

What is Globalization?What is Globalization?

Trend toward greater economic, Trend toward greater economic, cultural, political and technological cultural, political and technological interdependence among national interdependence among national institutions and economiesinstitutions and economies

Two components:Two components:• The globalization of marketsThe globalization of markets• The globalization of productionThe globalization of production

Globalization of MarketsGlobalization of Markets The merging of distinctly The merging of distinctly

separate national markets separate national markets into a global marketplaceinto a global marketplace• Falling barriers to cross-border Falling barriers to cross-border

trade have made it easier to sell trade have made it easier to sell internationallyinternationally

• Tastes and preferences Tastes and preferences converge onto a global normconverge onto a global norm

• Firms offer standardized Firms offer standardized products worldwide creating a products worldwide creating a world marketworld market

Globalization of MarketsGlobalization of Markets

Difficulties that arise from the Difficulties that arise from the globalization of marketsglobalization of markets• Significant differences still exist among Significant differences still exist among

national marketsnational markets• Country-specific marketing strategiesCountry-specific marketing strategies

• Varied product mixVaried product mix

Globalization of MarketsGlobalization of Markets

The most global The most global markets are not markets are not consumer marketsconsumer markets

The most global The most global markets are for markets are for industrial goods and industrial goods and materials that serve a materials that serve a universal need the universal need the world over world over

Globalization of ProductionGlobalization of Production

Refers to sourcing of goods and services Refers to sourcing of goods and services from locations around the world to take from locations around the world to take advantage ofadvantage of • Differences in cost or quality of the Differences in cost or quality of the

factors of productionfactors of production LaborLabor LandLand CapitalCapital

Globalization of ProductionGlobalization of Production

Historically this has been primarily Historically this has been primarily confined to manufacturing enterprisesconfined to manufacturing enterprises

Increasingly companies are taking Increasingly companies are taking advantage of modern communications advantage of modern communications technology, and particularly the Internet, technology, and particularly the Internet, to outsource service activities to low-cost to outsource service activities to low-cost producers in other nations producers in other nations

Globalization of ProductionGlobalization of Production Outsourcing of productive activities to Outsourcing of productive activities to

different suppliers results in the creation different suppliers results in the creation of products that are global in nature of products that are global in nature

Impediments to the globalization of Impediments to the globalization of production includeproduction include• Formal and informal barriers to tradeFormal and informal barriers to trade• Barriers to foreign direct investmentBarriers to foreign direct investment• Transportation costsTransportation costs• Issues associated with economic riskIssues associated with economic risk• Issues associated with political risk Issues associated with political risk

Benefits of GlobalizationBenefits of Globalization

GlobalizationGlobalizationof marketsof markets

GlobalizationGlobalizationof productionof production

• Reduces marketing costs

• New market opportunities

• Levels income stream

• Reduces marketing costs

• New market opportunities

• Levels income stream

• Access low-cost labor

• Acquire technical expertise

• Obtain production inputs

• Access low-cost labor

• Acquire technical expertise

• Obtain production inputs

Measuring GlobalizationMeasuring Globalization

Political engagementPolitical engagement - - membership membership and involvement in international and involvement in international organizationsorganizations

Technological connectivityTechnological connectivity – – Internet Internet users, hosts and secured serversusers, hosts and secured servers

Personal contactPersonal contact – – International International connectionsconnections

Economic integrationEconomic integration – trade, FDI, – trade, FDI, portfolio capital flows, and investment portfolio capital flows, and investment income income

Political Technological

Personal Economic

Top 20 Global NationsTop 20 Global Nations

The Globalization DebateThe Globalization Debate Pro FactorsPro Factors

• Lower prices for goods Lower prices for goods and servicesand services

• Economic growth Economic growth stimulationstimulation

• Increase in consumer Increase in consumer incomeincome

• Creates jobsCreates jobs• Countries specialize in Countries specialize in

production of goods and production of goods and services that are services that are produced most efficientlyproduced most efficiently

Con FactorsCon Factors• Destroys manufacturing Destroys manufacturing

jobs in wealthy, jobs in wealthy, advanced countriesadvanced countries

• Wage rates of unskilled Wage rates of unskilled workers in advanced workers in advanced countries declinescountries declines

• Companies move to Companies move to countries with fewer countries with fewer labor and environment labor and environment regulationsregulations

• Loss of sovereigntyLoss of sovereignty

International Business PlayersInternational Business Players

Business that has direct investments abroad in multiple

countries

Small companies and individuals becoming increasingly active in

international trade and investment

Takes a global perspective on its

market and engages in international business

from or near its inception

MultinationalCorporation

Small Businesses

and Entrepreneurs

Born-Global Firm

Levels/Terms of International Levels/Terms of International CompaniesCompanies

Multinational Enterprise (MNE): global Multinational Enterprise (MNE): global approach to markets and productionapproach to markets and production• Multinational Corporation (MNC)Multinational Corporation (MNC)• Transnational Company (TNC)Transnational Company (TNC)

Globally integrated company: integrated Globally integrated company: integrated operations located in different countriesoperations located in different countries

Multidomestic company: multinational Multidomestic company: multinational companies that allow local responsivenesscompanies that allow local responsiveness

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National Operations for National Operations for International CompaniesInternational Companies

Multidomestic strategyMultidomestic strategy: countries : countries operate autonomouslyoperate autonomously

Global strategyGlobal strategy: integrate various : integrate various country operations into an country operations into an international headquarters controlinternational headquarters control

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The National Composition of the The National Composition of the Largest MultinationalsLargest Multinationals

1973 1990 1997 2000

U.S.A. 48.5% 31.5% 32.4% 26%

J apan 3.5 12 15.7 17

U.K. 18.8 6.8 6.6 8

France 7.3 10.4 9.8 13

Germany 8.1 .9 12.7 12

How They Stack UpHow They Stack Up

Comparing revenue of the world's 10 most global firms to the gross domestic product of nations

Modes of International BusinessModes of International Business

Importing and exportingImporting and exporting Tourism and transportationTourism and transportation Licensing and franchisingLicensing and franchising Turnkey operationsTurnkey operations Management contractsManagement contracts Direct and portfolio investmentDirect and portfolio investment

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Patterns of InternationalizationPatterns of Internationalization

Figure 1.7Figure 1.7 1-16

Management in International Management in International BusinessBusiness

In additional to domestic business In additional to domestic business management skills, international business management skills, international business management requiresmanagement requires• Social science understandingSocial science understanding• Political science appreciationPolitical science appreciation• Legal awarenessLegal awareness• And an innate ability in:And an innate ability in:

Anthropology – study of mankind Anthropology – study of mankind (origins/belief/customs)(origins/belief/customs)

Sociology – development and behaviour of societySociology – development and behaviour of society Psychology – study of mindPsychology – study of mind EconomicsEconomics Geography Geography

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Managing in the Global Managing in the Global MarketplaceMarketplace

Managing an international business is Managing an international business is different from managing a purely domestic different from managing a purely domestic business in four areas:business in four areas:• Countries are differentCountries are different• Range of problems confronted by a manager in an Range of problems confronted by a manager in an

international business is wider and the problems international business is wider and the problems themselves are more complex than those confronted by a themselves are more complex than those confronted by a manager in a domestic businessmanager in a domestic business

• An international business must find ways to work within the An international business must find ways to work within the limits imposed by government intervention in the limits imposed by government intervention in the international trade and investment systeminternational trade and investment system

• International transactions involve converting money into International transactions involve converting money into different currencies different currencies

Global ManagerGlobal Manager

Know How to Analyze Problems

Know How to Analyze Problems

Improve Logistics

Improve Logistics

Market Effectively

Market Effectively

Develop World-Class

Products

Develop World-Class

Products

Emphasize Global

Awareness

Emphasize Global

Awareness

Know the Customer

Know the Customer

The Keys to

Success

The Keys to

Success