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Sitkin and Bowen
International Business
Chapter 1: Introduction
Section I. The international context
- Terminology and useful concepts
- Key statistics
The International Business framework
- Strategic drivers
- Challenges and choices
© Oxford University Press, 2013. All rights reserved.
Globalization
• Because of globalization, for the first time in
history, the availability of international
products and services can be accessed by
individuals in many countries, from diverse
economic backgrounds.
Sitkin & Bowen: International Business, 2nd edition
4-2
What is International Business?
International business consists of
transactions that are devised and carried
out across national borders to satisfy the
objectives of individuals, companies, and
organizations.
Sitkin & Bowen: International Business, 2nd edition
4-3
Difference between International Business
and Globalization
• International business is just the actual process of
conducting business between agencies in different
countries.
• Globalization is the process that leads to declining
costs of conducting international business.
• So, International business is conducting it, &
globalization is about lower transaction costs.
Sitkin & Bowen: International Business, 2nd edition
4-4
• More and more firms around the world are
going global, including:
– Manufacturing firms eg. 3M
– Service companies (i.e. banks, insurance,
consulting firms) eg. Barclays bank
– Art, film, and music companies
eg. 20th Century Fox.
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4-5
Basic principles
• ‘Globalization’ and ‘international business’ (IB) are based
on two different paradigms (worldviews):
- Seeing world as a whole (stressing similarities), vs.
- Focusing on differences between home and host
countries (stressing differences)
• IB acknowledges difficulties of operating cross-border:
- ‘Psychic distance’ between home and host country
- ‘Insiderization’ strategies to overcome ‘home bias’
- There is no one right way of doing IB
Sitkin & Bowen: International Business, 2nd edition
Companies doing international business
• Corporate actors
- Multinational enterprises (MNEs)
- Can include small and medium sized enterprises (SMEs)
•
Non-corporate actors
- Governments and intergovernmental organizations
- Other stakeholders
IB focuses on both categories and is therefore broader than
International Management, which highlights the former
Sitkin & Bowen: International Business, 2nd edition
International Business Terminology
•
•
•
•
•
International business
Foreign business
Multidomestic company (MDC)
Global company (GC)
International company (IC)
Sitkin & Bowen: International Business, 2nd edition
1-8
International Business Terminology, cont’d.
• International Business
– A business whose activities are carried out across
national boarders
• Foreign Business
– The operations of a company outside its home or
domestic market
• Multidomestic Company
– An organization with multicountry affiliates
• Each formulates its own business strategy on perceived
market differences
Sitkin & Bowen: International Business, 2nd edition
1-9
International Business Terminology, cont’d.
• Global Company
– an organization that attempts to standardize and
integrate operations worldwide in most of all
functional areas
• International Company
– A global or multidomestic company
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1-10
MNE configurations
• Head office vs. international subsidiaries: centre/boarders
• Firms trade into host country and/or create a physical
presence there = Foreign Direct Investment (FDI)
• Different MNE units often fulfil different functions,
depending on where they operate along value chain:
- Upstream (production) side
- Downstream (marketing side)
Sitkin & Bowen: International Business, 2nd edition
Competing in Global Markets
• Exports—domestically produced goods and
services sold in other countries.
• Imports—foreign goods and services
purchased by domestic customers.
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Measuring Trade Between Nations
• Balance of trade—difference between a
nation’s exports and imports.
– Trade surplus
when a country exports more than it imports and
achieves a positive balance of trade
– Trade deficit
when a country imports more than it exports and
achieves a negative balance of trade
Sitkin & Bowen: International Business, 2nd edition
4-13
Why Nations Trade
• International trade is vital because:
– It expands markets for products
– Allows companies to seek out growth
opportunities in other nations
– Makes production and distribution systems more
efficient
– Reduces firms’ dependence on the economies of
their home nations
Eg. Carrefour, Wal-Mart, Tesco
Sitkin & Bowen: International Business, 2nd edition
4-14
Internal drivers of IB activity
• Expanding sales
- Leverage existing competencies
- Activities that are international by their very nature(commodities)
- Achieve critical mass
• Spreading risk
- Country risk
- Product life cycle risk
- Foreign exchange risk
• Acquiring inputs
- Physical resources
- Human capital
Sitkin & Bowen: International Business, 2nd edition
External drivers of IB activity
• Technology
• Regulatory framework
- Legalities
- Barriers to entry
• Global competition
• International finance
Sitkin & Bowen: International Business, 2nd edition
Globalization Forces
• Political forces
– Reduction of barriers to trade and foreign
investment by governments
– Privatization of former communist nations
• Technological forces
– Advances in computers and communications
technology
– Internet and network computing
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Globalization Forces, cont’d.
• Market forces
– Globalizing companies become global customers
• Cost forces
– Goal for economies of scale to reduce unit costs
• Competitive forces
– Increase in intensity due to explosive growth in
international business
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1-18
Why is International business Different from
Domestic Business?
• Environment: all the forces surrounding and
influencing the life & development of the firm.
• External/ Uncontrollable forces- No direct
control of management.
– Competitive, distributive, Economic (Unit labor
cost, GNP, personal consumption expenditure)
– Socioeconomic, financial, legal, physical, political,
sociocultural, labor, technological
Sitkin & Bowen: International Business, 2nd edition
4-19
Why is International business Different from
Domestic Business?
• Internal/ Controllable forces- control of
management.
– For eg. Some European concerns & foreign
subsidiaries in EU have relocated parts of their
operations to other nations in the Union to exploit
the lower wages there.
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4-20
Why is International business Different from
Domestic Business?
• Domestic Environment: All the controllable
forces originating in the home country.
• Foreign Environment: All the uncontrollable
forces originating outside the home country
that surround and influence the firm.
• International Environment: Interaction
between domestic & foreign environmental
forces
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4-21
Environments of International Business
• Environment
– All the forces influencing the life and development
of the firm
• Forces
– External Forces (Uncontrollable) – Forces over
which management has no direct control
– Internal Forces (Controllable) – Forces that
management can use to adapt to external forces
Sitkin & Bowen: International Business, 2nd edition
1-22
External Forces
• Competitive
– Kind, number, location
• Distributive
– For distributing goods and services
• Economic
– GNP, unit labor cost, personal consumption
expenditure
• Socioeconomic
– Characteristics of human population
• Financial
– Interest rates, inflation rates, taxation
Sitkin & Bowen: International Business, 2nd edition
1-23
External Forces, cont’d.
• Legal
– Laws governing how international firms must operate
• Physical
– Topography, climate, and natural resources
• Political
– Forms of government, and international organizations
• Sociocultural
– Attitudes, beliefs, and opinions
• Labor
– Skills, attitudes of labor
• Technological
– Equipment and skills that affect how resources are converted to
products
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Internal Environmental Forces
• Factors of Production
– Capital, raw materials, and people
• Activities of the organization
– Personnel, finance, production, and marketing
Sitkin & Bowen: International Business, 2nd edition
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Why Is International Business
Different?
• Domestic Environment
– All the uncontrollable forces in the home country
that surround and influence the firm’s life and
development
• Foreign Environment
– All the uncontrollable forces originating outside the
home country that surround and influence the firm
• different values
• difficult to assess
• interrelated
Sitkin & Bowen: International Business, 2nd edition
1-26
Why Is International Business
Different? cont’d.
• International Environment
– Interaction between domestic and foreign
environmental forces or between sets of foreign
environmental forces
– Increased complexity for decision-making
• Decision making more complex
Sitkin & Bowen: International Business, 2nd edition
1-27
Going Global
• While expanding into overseas markets can
increase profits and marketing opportunities, it
also introduces new complexities to operations.
• Key decisions before expanding overseas
include
– Determining which foreign markets to enter
– Analyzing the expenditures required
– Deciding on the best way to organize overseas
operations
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4-28
Types of International Business
Sitkin & Bowen: International Business, 2nd edition
Going Global
• Levels of Involvement in International
Business
Sitkin & Bowen: International Business, 2nd edition
Explosive Growth
• Foreign Direct Investment and Exporting
– FDI - Direct investment in equipment, structures,
and organizations in a foreign country
• level sufficient to obtain significant management control
(Table 1.2)
– Exporting – transportation of any domestic
good/service to a destination outside a country or
region
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1-31
Ethical issues for MNCs
– Corruption — illegal practices that further one’s
business interests.
– Sweatshops — employing workers at low wages
for long hours and in poor working conditions.
– Child labor — full-time employment of children for
work otherwise done by adults.
– Sustainable development — meeting current
needs without compromising future needs.
– Xenophobia (in the sense of fear of foreignness)
Sitkin & Bowen: International Business, 2nd edition
4-32
International Business Model
Sitkin & Bowen: International Business, 2nd edition
1-33
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