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International Business:An Overview

1Objectives

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

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

2001 Prentice Hall1-5

Introduction to International Business (IB)IBall commercial transactions between two or more countriesInvolves modes of business that differ from those at the domestic levelForeign conditions diversity companys external environmentWhy Companies Engage in IBExpand salesgreater purchasing power in the world as a wholeAcquire resourcesproducts, services, componentsalso, foreign capital, technologies, informationDiversify sources of sales and suppliestakes advantage of business cycle differences among countriesMinimize competitive riskprevent competitor from gaining advantages

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International Business: Operations and Influences Modes Importing and exporting Tourism and transportation Licensing and franchising Turnkey operations Management contracts Direct and portfolio investmentFunctions Marketing Production Accounting Finance Human resources

OverlayingAlternatives Choice of countries Organization and control mechanisms

MEANSEXTERNAL INFLUENCES COMPETITIVE ENVIRONMENT Major advantage in price, marketing, innovation, or other factors Number and comparative capabilities of competitors Competitive differences by country PHYSICAL AND SOCIETAL FACTORS Political policies and legal practices Cultural factors Economic forces Geographical influencesOPERATIONS OBJECTIVES Sales expansion Resource acquisition Diversification Competitive risk minimizationSTRATEGY10

Reasons for Growth of IBExpansion of technologytransportation and communication are quicker and less costlyLiberalization of cross-border movementsGovernment barriers reduced because:desire for better access to greater variety of goods and servicesdomestic producers forced to be more competitivelowered trade barriers to their own exportsDevelopment of supporting services by business and governments to:Ease the flow of goods and services sold abroadReduce risks of IB Increase in global competitionfirms have become more global to maintain competitiveness

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Means of Carrying Out International Operations Modes Importing and exporting Tourism and transportation Licensing and franchising Turnkey operations Management contracts Direct and portfolio investmentFunctions Marketing Production Accounting Finance Human resourcesOverlayingAlternatives Choice of countries Organization and control mechanismsMEANSEXTERNAL INFLUENCES COMPETITIVE ENVIRONMENTPHYSICAL AND SOCIETAL FACTORS OPERATIONS OBJECTIVESSTRATEGY13Modes of IBMerchandise exports and importsmost common international economic transaction, especially for smaller companiesMajor source of international revenue and expenditures for most companiesService exports and importsnonproduct international earningsTourism and transportationPerformance of services for a feeturnkey operationsmanagement contractsUse of assets by otherslicensing agreementsroyaltiesFranchisingfranchisor:allows franchisee to use trademarkprovides components, technology, services

14Modes of IB (cont.)Investmentsownership of foreign property in exchange for financial returnForeign direct investmentinvestor gains a controlling interest in foreign companyjoint venturemixed venturePortfolio investmentnoncontrolling interestInternational CompaniesterminologyStrategic alliancecollaborative arrangement of critical importance to the competitive viability of one or more partnersMultinational enterprise (MNE)company with global approach to foreign markets and productionGlobally integrated companyintegrates operations located in different countriesMultidomestic companyforeign-country operations act fairly independently

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Physical and Societal Influences on International Business EXTERNAL INFLUENCES COMPETITIVE ENVIRONMENT PHYSICAL AND SOCIETAL FACTORS Political policies and legal practices Cultural factors Economic forces Geographical influences OPERATIONSOBJECTIVESMEANSSTRATEGY17External Influences on IBPhysical and societal factorsmust understandPolitics that affect whether and how IB occursDomestic and international law determines what managers can do in IBEconomicsGeographydetermine location and availability of worlds resourcesCompetitive environmentVaries by industry, company, and countrystrategies differ across companiese.g., importance of controlling labor costse.g., influence of local and international competitors size of market differs across countries

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Competitive Environment and International Business OPERATIONSOBJECTIVESMEANSSTRATEGYEXTERNAL 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

19Evolution of Strategy in International ProcessRisk minimizationforeign operations viewed as risky international commitments evolve graduallyPatterns of expansionPassive to active pursuit of IB opportunities initially wait for foreign opportunityExternal to internal handling of IBrely on intermediaries at firstLimited to extensive modes of operationsbegin with importing or exporting operationFew to many foreign locationsSimilar to dissimilar business environmentsLeapfrogging of expansionnew companies begin with international focusPossible because of founders experience and technological advances that help define foreign markets

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DomesticBusinessThe Usual Pattern of InternationalismHIGH

MEDIUM

LOWCMode ofoperationsLimitedforeignfunctions,usuallyexport/importExtensiveproductionabroad withFDI and allfunctionsLimited foreignproduction andmultiple functionsAImpetus forinternationalbusinessActive searchfor opportunitiesPassiveresponse toproposalsDOneSeveralManyNumber of foreign countries in which a firm does business EQuitesimilarVerydissimilarModeratelysimilarDegree ofsimilaritybetweenforeign anddomesticcountriesBOther firmshandle externalcontractsCompany handlesits own foreignoperationsInternal versusexternal handling offoreign operations21Countervailing Forcescomplicate decision makingGlobal standardsexport suited to many countriesresults in economies of scalebased on global strategyNationally responsive practicesadjust product or service to unique local conditionsmultidomestic approach advisableCountry versus company competitivenessCompanies compete by seeking maximum efficiency on a global scaleCountries compete with each other to attain economic, political, and social goalsno consensus on measures of goal attainmentRelationship unclear between country and company performancehigh-value activitiesproduce high profits or performed by well-paid employees

22Countervailing Forces (cont.)Sovereigntyfreedom from external controlCountries will cede in order to:gain reciprocal advantagesbilateral or multilateral commercial treaties or agreementsattack problems that cannot be solved by a single countryproblem is too big or widespreadproblem results from conditions that spill over from another countrydeal 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 exploitationother countries want to share the spoils

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