INTERNATIONAL BUSINESS MANAGEMENT NOTES
INTERNATIONAL BUSINESS TERMINOLOGIES:
1. GLOBAL COMPANY---it’s the one that searches the world for market opportunities,
sources for products, raw materials, knowledge, innovation, financing, and personnel. It
has a global vision
2. MULTI-NATIONAL COMPANY—it’s a holding company with several overseas
operations
3. TRANSNATIONAL COMPANY—according to the UN its any company doing business
in more than one country
4. Multi-domestic company—it's an organization with multi-country affiliates, each of
which formulates its business strategy based on perceived market differences.
Foreign business—means the operations of a company outside its home or domestic
market. This term is used interchangeably with international business.
5. International business is a business whose activities are carried out across borders. This
definition includes not only international trade and foreign manufacturing but also service
industry in areas such as transportation, advertisement, construction, retailing, wholesaling,
and mass communication.
6. International company—is an organization that attempts to standardize and integrate
operations worldwide in most of all function areas.
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International Business Environment
It is concerned with the issues facing international companies and governments with all
types cross border transactions. It involves all business transactions involving two or more
countries. International business consists of transactions that are devised and carried out across
borders to satisfy the objectives of individuals and organizations. International business consists
of those activities of private and public enterprise that involves the movement across national
boundaries of goods and services, resource, knowledge, and skills. International business can
simply be defined as a cross-border economic activity.
The (IBE) International Business Environment is multidimensional including the political
risks, cultural differences, exchange risks, legal & taxation issues. Therefore (IBE) International
Business Environment comprises the political, economic, regulatory, tax, social & cultural, legal,
& technological environments.
An international business environment is the surrounding in which international companies
run their businesses. It brings along it with many differences.
Thus, it is mandatory for the people at the managerial level to work on the factors that make an
International Business Environment.
The Difference – Business Environment and International Business
International business is an exchange of goods and services that conducts its operations
across national borders, between two or more countries. International business[1] is also known
as Globalization whereas, a Business Environment is the surrounding in which the international
companies operate.
Advantages of International Business Environment

Helps in expanding the business,
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
Exposure to more customers

Helps in the proper management of the product life cycle and

Helps in mutual growth
Political Environment
The political environment refers to the type of government, the government's relationship
with a business, & the political risk in the country. Doing business internationally, therefore,
implies dealing with a different type of government, relationships, & levels of risk.
There are many different types of political systems, for example, multi-party democracies, oneparty states, constitutional monarchies, dictatorships (military & non-military). Therefore, in
analyzing the political-legal environment, an organization may broadly consider the following
aspects:

The Political system of the business;

Approaches of the Government towards business i.e. Restrictive or facilitating;

Facilities & incentives offered by the Government;

Legal restrictions for instance licensing requirement, reservation to a specific sector like
the public sector, private or small-scale sector;

The Restrictions on importing technical know-how, capital goods & raw materials;

The Restrictions on exporting products & services;

Restrictions on pricing & distribution of goods;

Procedural formalities required in setting the business
Economic Environment
The economic environment relates to all the factors that contribute to a country’s
attractiveness for foreign businesses. The economic environment can be very different from one
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nation to another. Countries are often divided into three main categories: the more developed or
industrialized, the less developed or third world, & the newly industrializing or emerging
economies.
Within each category, there are major variations, but overall, the more developed countries
are the rich countries, the less developed the poor ones, & the newly industrializing (those moving
from poorer to richer). These distinctions are generally made based on the gross domestic product
per capita (GDP/capita). Better education, infrastructure, & technology, healthcare, & so on are
also often associated with higher levels of economic development.
Clearly, the level of economic activity combined with education, infrastructure, & so on, as
well as the degree of government control of the economy, affect virtually all facets of doing
business, & a firm needs to recognize this environment if it is to operate successfully
internationally. While analyzing the economic environment, the organization intending to enter a
particular business sector may consider the following aspects:

An Economic system to enter the business sector.

Stage of economic growth & the pace of growth.

Level of national & per capita income.

Incidents of taxes, both direct & indirect tax

Infrastructure facilities available & the difficulties thereof.

Availability of raw materials & components & the cost thereof.

Sources of financial resources & their costs.

Availability of manpower-managerial, technical & workers available & their salary &
wage structures.
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Technological Environment
The technological environment comprises factors related to the materials & machines used
in manufacturing goods & services. Receptivity of organizations to new technology & adoption of
new technology by consumers influence decisions made in an organization.
As firms do not have any control over the external environment, their success depends on
how well they adapt to the external environment. An important aspect of the international business
environment is the level, & acceptance, of technological innovation in different countries.
The last decades of the twentieth century saw major advances in technology, & this is
continuing in the twenty-first century. Technology often is seen as giving firms a competitive
advantage; hence, firms compete for access to the newest in technology, & international firms
transfer technology to be globally competitive.
It is easier than ever for even small business plans to have a global presence thanks to the
internet, which greatly grows their exposure, their market, & their potential customer base. For
economic, political, & cultural reasons, some countries are more accepting of technological
innovations, others less accepting. In analyzing the technological environment, the organization
may consider the following aspects:

Level of technological development in the country as a whole & specific business sector.

The pace of technological changes & technological obsolescence.

Sources of technology.

Restrictions & facilities for technology transfer & time taken for the absorption of
technology.
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Cultural Environment
The cultural environment is one of the critical components of the international business
environment & one of the most difficult to understand. This is because the cultural environment is
essentially unseen; it has been described as a shared, commonly held body of general beliefs &
values that determine what is right for one group, according to Kluckhohn & Strodtbeck.
National culture is described as the body of general beliefs & the values that are shared by
the nation. Beliefs & values are generally seen as formed by factors such as history, language,
religion, geographic location, government, & education; thus, firms begin a cultural analysis by
seeking to understand these factors. The most well-known is that developed by Hofstede in1980.
His model proposes four dimensions of cultural values including individualism, uncertainty
avoidance, power distance & masculinity.
Individualism is the degree to which a nation values & encourages individual action &
decision making.
Uncertainty avoidance is the degree to which a nation is willing to accept & deal with
uncertainty.
Power distance is the degree to which a national accepts & sanctions differences in power.
This model of cultural values has been used extensively because it provides data for a wide array
of countries. Many academics & managers found that this model helpful in exploring management
approaches that would be appropriate in different cultures.
For example, in a nation that is high on individualism one expects individual goals, individual
tasks, & individual reward systems to be effective, whereas the reverse would be the case in a
nation that is low on individualism.
While analyzing social & cultural factors, the organization may consider the following aspects:
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
Approaches to society towards business in general & in specific areas;

Influence of social, cultural & religious factors on the acceptability of the product;

The lifestyle of people & the products used for them;

Level of acceptance of, or resistance to change;

Values attached to a particular product i.e. the possessive value or the functional value of
the product;

Demand for the specific products for specific occasions;

The propensity to consume & to save.
Competitive Environment
The competitive environment also changes from country to country. This is partly because
of the economic, political, & cultural environments; these environmental factors help determine
the type & degree of competition that exists in a given country. Competition can come from a
variety of sources. It can be from a public or a private sector, come from large or small
organizations, be domestic or global, & stem from traditional or new competitors. For a domestic
firm, the most likely sources of competition might be well understood. The same isn’t the case
when a person moves to compete in a new environment.
HISTORY OF INTERNATIONAL BUSINESS
International business as a discipline is new but as a business practice is not. Before Christ,
the Phoenicians and Greek merchants were sending representatives abroad to sell their goods. The
early civilization of Egypt and Mesopotamia shows that the two countries traded with each other.
Expansion of agriculture and industrial production in China simulated the emergence of an
internationally integrated trading system. The saying “all roads lead to China” had relevance
within the international trading system. This is because China was the leading manufacturing
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country for about 1800 years until it was replaced by Britain in 1840. The impact of the emerging
international trading system was extensive. Politics, Art, Agriculture, industry, and other sectors
of human life were profoundly influenced by goods and ideas that came with trade. It also affected
public health e,g international trade is associated with the spread of plaque which is believed to
have originated from Asia and moved West with traders and soldiers. This was the worst natural
disaster in history. (Think of today, the severe acute respiratory syndrome (SAARS) AND Avian
flu/coronary virus/Corona.)
The rise of the Ottoman Empire before 1300 influenced trade routes for people, goods,
money, and animals from England to China across the Mediterranean and North Africa then
through central Asia to the Indian Ocean region. Ottoman Empire was located within the trade
routes and decided to raise the cost of Asian trade for the Europeans. In the 15th century, Europe
began exploring the sea to find new routes to Asia.
In 1600 British East India Company began to establish foreign branches throughout Asia
an action which was soon followed by other European nations. They intended to exploit trade
opportunities for their national advantage. These nations included Portugal, the Netherlands, and
France. In 1600 Dutch East India Company was formed to carry out colonial activities in Asia and
to open ocean trade routes to the East. It was the first company to issue stock and is frequently
referred to as the first world multinational corporation. By 1600 ships of European trading
companies traveled to Asia through the Atlantic, Indian and Pacific oceans a route which was
protected by the governments.
They acquired goods for sale within the Asian market and returned to Europe with valuable
cargoes of cloths, spices, and other goods which gave them a lot of profit. The 17TH AND 18TH
centuries are referred to as the Age of Mercantilism. This is because Nations could be termed
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powerful depending on the sponsorship and control of merchant capital which expanded under the
protection of the National government.
By 1900 at least 37 American companies had production facilities in two or more overseas
locations. Interestingly and quite a contrast to today, in the 1920s all cars sold in Japan were in the
USA by Ford and General Motors and send to Japan in parts to be assembled locally. European
companies were also moving overseas e.g. Friedrich Bayer set a branch in Germany Russia, France
than Belgium. This means Multinational companies existed before world wars. Multinationals
became a subject of discussion recently especially with the increasing globalization of their
operations.
GLOBALIZATION:
Although globalization is discussed everywhere in the television shows, internet, political
meetings, parliament, boardrooms, and labor markets it so far has no widely accepted definition.
The most common definition and the one used in international business is that of economic
globalization which is the tendency toward integration of goods, technology, information, labor,
and capital or the process of making this integration happen. The term globalization was coined
by Theodore Levitt in a Harvard Business Review article where he stated that new technology has
eased communication, transport, and travel creating a worldwide market standardized consumer
product at a lower price.
The founder of the World Economic Forum - Prof. Klauss said in part, “we want to look
beyond the economic dimension of what is happening its Globality…” Bill Gates announced at
the WEF meeting that Microsoft would add Globality to its dictionary. Ulrich Beck, a German
sociologist stated that globality is an unavoidable condition and from now on nothing that happens
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on our planet is only limited to local conditions. “All inventions, victories and catastrophes affect
the whole world”
Globalization can be understood from different perspectives including
1. Economists
2. Political scientists
3. Sociologists
4. International relation specialists
Definition1
It’s the process of transformation of a local phenomenon into a global one. It is the process
by which the people of the world are unified into a single society that functions together. This
process is a combination of economic, technological, social-cultural, and political forces. It’s the
widening, deepening, and spreading of interconnectedness in all aspects of contemporary social
life from the cultural to criminal and financial to the spiritual aspect.
Definition 2
Its increasing global interconnectedness so that events in one part of the world are affected
by, have to take account of, and also influence other parts of the world.
Tiplay refers to it as an increasing sense of a single global whole. This means there's a worldwide
movement towards economic-financial trade and communication integration.
Definition 3.
It refers to the shift towards a more integrated and interdependent world economy through
the merging of historically distinct and separate national markets into one huge global marketplace
(Hill 2005). It’s the process by which the world becomes a single market. This means goods,
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services, capital, and labor are traded on a worldwide basis. It also means information and results
of research flow readily between countries. Black J (2002)
Definition 4
Globalization reflects a business orientation based on the belief that the world is becoming
more homogeneous and that distinctions between national markets are not only fading but also
some products will eventually disappear.
DRIVERS OF GLOBALIZATION
The five major drivers leading international firms to the globalization of their operations
are:
1. political; there’s a trend towards unification and socialization of the global community.
Preferential Trade Area that groups several nations into one market have presented
companies with significant marketing opportunities e.g., European Union, East African
community, etc. This has led to a progressive reduction of barriers of trade which has
opened new markets for international firms that are exporting and building production
facilities in these areas.
2. The privatization of much of the industry in formerly communist nations and opening of
their economies to global competition.
3. Technological advancement; advances in computers and communication technology are
permitting an increased flow of ideas and information across borders. This enables
customers to learn about foreign goods. Cable and satellite systems allow advertisers to
reach numerous countries.
A global communication network enables manufacturing personnel to coordinate production
and design functions worldwide so that plants in many parts of the world may be working on the
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same product. Internet and network computing enable small companies to compete globally
because they make the possible rapid flow of information.
Internet and video conferencing enable sellers to demonstrate their products to prospective
buyers all over the world without the need to travel. Communicating through Email is faster and
more reliable than using a fax machine. Managers can direct their operations overseas using the
internet (E-Commerce). The emergence of 4th and now 5th G broadband wireless
telecommunication technologies and associated applications promises to further accelerate this
trend.
4. Market; - as companies globalize, they also become global customers e.g., when Nokia
announced its intention to set up cellphone assembly in India, suppliers of key components
did the same to avoid competitors and to capture the business. Finding a home market
saturated also sends companies to foreign markets. According to a survey done among
international corporations, 84% of these companies expect that overseas markets will
generate their growth in the next 5 years.
5. Economies of Scale; - to reduce unit cost is always the goal of a manager. The economy
of scale is when a company increases output using the same equipment. One means of
achieving them is to globalize the product lines to reduce development, production, and
inventory costs. The company can also move production or other parts of the company’s
value chain to countries where the costs are lower. Reduction in the cost of generating and
transmitting information due to innovations in computing and telecommunications as well
as the decline in transportation cost has facilitated this trend towards relocating activities
worldwide.
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6. COMPETITION; - competition continues to increase at a faster rate. New companies
from newly industrializing and developing nations have entered the world market.
Companies are defending their home markets from competitors by entering the
competitors' home market to distract them. This rush to globalization has led to an increase
and explosive growth in international business.
INDICATORS OF GROWTH OF INTERNATIONAL FIRMS AND INTERNATIONAL
BUSINESS
The size and number of international firms have been increasing rapidly. The level of direct
foreign investment and exporting has also increased. UNCTAD a UN agency in charge of matters
related to foreign direct investment has estimated that there are 64,000 trans-national corporations
involved in cross-border activities. These companies have approximately 866,000 foreign
branches which collectively employ 53 million people. These branches of foreign companies have
become increasingly important in the industrial and economic life of many nations.
Some countries started viewing the expanding foreign-owned companies on their soil as a
threat to their autonomy. Yet leaders of these governments knew that local firms must obtain
modern commercial technology inform of direct investment and the right to use the international
companies’ expertise if they were to be competitive in the world markets. This, therefore, has made
the leaders change their attitude and liberalize government policies towards foreign investment.
There are still critics of large firms who cite that these firms make a lot of sales and income as
compared to many countries in the world.
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A firm size may at times give its bargaining power especially in the case where a
government wants the firm to set up its subsidiaries because of the employment it will offer. It can
also be allowed because of the purchases it will make from other firms in that country.
Foreign direct investment and exports are growing rapidly:
One of the commonly used measures of where and how international business is taking
place is the increase in total direct foreign investment. Foreign direct investment is an investment
in equipment, structures, and organization in a foreign country at a level that is sufficient to obtain
management control.
It does not include foreign investment in the stock market. International business involves
exporting which is the transportation of any domestic goods or services to a destination outside a
country or a region. The trend shows that it has grown faster due to globalization. The world
merchandise export has grown from $2034 billion in 1980 to $13898 billion in 2000. Service
export grew from $365 in 1980 to 3257 billion in 2000. Exports generally doubled between 2000
to 2007.
International Business as Distinguished from Global
International business because of its cross-border nature raises several challenges that
business practitioners and academicians ignore. It can be a very difficult adjustment for companies
or individuals leaving a home country to operate in a host country where the environment and
people are foreign to them. It is true the world has shrunk over human history and that globalization
has been a key factor in this process. But it's unrealistic and even dangerous to assume that societies
worldwide are converging to such an extent that there is no longer any need to study their
economic, political, and cultural differences.
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By differentiating the term global and international one can be able to recognize that the
world remains a complex and diverse place. The word global is associated with the idea of a single
world and so stresses similarities between different communities. The word international starts
with an emphasis on lack of similarity. This acknowledges the specific obstacles that arise when
people from different nations and cultures come together. It also prepares practitioners to develop
insiderization strategies that are necessary to overcome many barriers that people face when they
cross borders.
Making a distinction between international and global is important because it leads to the
expectation that international business strategies and behavior that apply in one situation may not
be appropriate in another. i.e., there is no one best way of doing business.
MAIN FACTORS DRIVING INTERNATIONAL BUSINESS TODAY
Internal drivers
1. To expand sales
2. Leveraging existing competencies i.e., selling finished products without modification into the
new market.
3. To avoid saturation due to competition.
4. Risk diversification---i.e., The desire to spread risk by working in more than one country at a
time. Spreading risk is seen as a safe business principle because it helps to avoid
overdependence on a single location or market. E.g., if a firm had its all assets in China and
another terrible Katerina was to hit the area again its chances of continuing its operations would
be next to impossible than if it had another plant in an area not affected by an earthquake or
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Katerina. That’s why many companies have a disaster plan to continue functioning in case a
catastrophe affects one location.
Also, a company selling in one market runs the risk that the market might collapse without
there being any other customers to compensate for lost sales. ( imagine people whose entire
business revolved around exports to Iraq in the 2003 invasion, it would have difficulties surviving.
Spreading risk through international operations can be done commercially using the product life
cycle.
This from an international marketing perspective is where a product may be in demand in one
country and decline in another. (In the 70s and 80s jeans were expensive in Europe but decline in
California). International business can be used to diversify other risks especially when currencies
rates fall.
5. Acquire inputs/access more efficient inputs-this means acquisition of resources i.e., material,
labor, capital, and technology which are used during a firm’s production process, this involves
inputs that are unavailable at home. The companies may look for the source of inputs they need
abroad where its cost may be lower.
6. It could also be looking for labor that can be acquired cheaply. International business is
therefore often driven by firms focusing more on advantages inherent to a given production
location than on whether the location is in their country of origin or not.
External Drivers of International Business
1. Technology; it’s not easy to determine which drivers a company can control and which it
cannot e.g., technology. Technology is an umbrella term that refers to companies’ internal
innovation efforts and also technology advances that a particular society achieves as a whole.
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Technology affects international business at different levels. Improved telecommunication
enables companies to stretch their value chains to distance locations offering a competitive
advantage e.g. when a hospital in the west used remote diagnostic facilities to get advice from
doctors located in India. Extension of company-customer relationship worldwide due to internet.
e.g., when customers purchase their books through amazon instead of from their local bookstore.
This shows technology is a key organizing principle in international business. Communities have
been able to interact due to technology e.g., google rapid rise in China has given China a lot of
exposure to western consumption goods. People's outlook and desires often change when they see
how foreigners live. Cross-border comparison has been a significant driver to international
business.
2. Liberalized Regulatory Framework: for international business to exist there has to be a
general regulatory framework enabling it. one of the responsibilities of a national government
is to ensure the wellbeing of its population in the face of danger from abroad. Foreign economic
competition can be damaging to some of the local economies but the state will come to a
judgment on what kind of international business they find acceptable.
Since the 1980’s many countries have promoted cross-border flows by allowing foreigners to
enter their domestic marketplaces. This has led to a reduced barrier to entry. This liberalized
philosophy has created a global framework that is conducive to international business. It has led
to the rise of international institutions which are trade friendly like the world trade organization. It
has led also to regional trading arrangements like European Union, EAC, OPEC, SADCC, etc.
They create policies enabling easier access to each other’s market.
3. Global competition. Due to the increasing penetration of national borders competition can
come from anywhere affecting the competitive advantage they have enjoyed at home for a
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long. This would make these companies suddenly lose market share because of the arrival of
a foreign company. Because of this competition companies should start thinking in
international terms. Consumers' greater awareness of possible foreign alternatives to domestic
products and their ability to access rival products at competitive prices has given buyers greater
power over sellers. E.g., firms in Germany Telefunken (Grundig) were making televisions and
were the only ones and they made a lot of profit until the arrival of cheaper Japanese
alternatives. Today they survive as the brand name listed on other firms’ products. Due to
consumer awareness and their demand patterns. Companies have come to realize that
regardless of how they operate outside their international borders international business will
affect them at one level or the other.
4. International finance: To source the capital needed to run the big multinational companies
one has to rely on different funding sources. The deregulation of the finance industry since the
1980s has led to an explosion of cross-border capital flows. This money is free-floating and
not directly associated with the production of goods and services. It’s a problem especially
looking at the financial asset prices which are becoming unpredictable adding to the
uncertainty of international business. At the same time managers need to make financial returns
quickly and it has to be by taking a risk.
EFFECT OF GLOBALIZATION
Globalization has been a subject of heated debates recently. There have been protests about
globalization and liberalization of international trade at the WTO meetings. There is no single
measure of globalization or integration of the world economy. Each element of global
integration can have different effects.
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Argument Supporting Globalization
Horsk Kohler states that expanding trade by collectively reducing barriers is the most powerful
tool that countries working together can deploy to reduce poverty and raise living standards. Free
trade enhances socio-economic development. This has been demonstrated in practice. Data have
shown a clear and definite link between the liberalization of trade and economic growth. Poverty,
education, and life expectancy are some of the noticeable measurable aspects. People have become
better off, at a faster pace than any other time in history.
There’s a noticeable decline in destitute people. The world development indicators show a
decline in poverty from 1.5 billion in 1981 to 1.1 billion in 2002. Life expectancy has doubled in
the developing world. Infant mortality has decreased and Global literacy has grown. Greater levels
of civil liberties and political rights have increased. There has been improvement in the human
condition and this success story is owed to globalization. Free trade promotes more and better jobs.
Argument Against Globalization
Richard Trumka –states, “we are not against trade, we want trade rules that allow us to compete
fairly in the marketplace. The record is clear. The current trade policy isn’t working. It has led to
the loss of jobs, human rights abuses and will leave plants closing. Broadly publicized
demonstrations for example the battle of Seattle—that wrecked the WTO in Seattle in 1999, and
IMF and World Bank meetings in Washington D.C brought world attention to the antiGlobalization movement.
What are some of the primary concerns of these anti-global movements?
1. Globalization has produced uneven results across nations and people
2. Globalization has had a deleterious effect on labor and labor standards
3. Globalization has contributed to a decline in environmental and health conditions
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Globalization has produced uneven results across nations and people
They complain of the painful impact of foreign investment and liberalization of trade on the
people of the world. The promise of export-led growth has failed to materialize i.e., Latin America
has failed to replicate Asia's success despite the effort to liberalize and privatize. It has led to
disappointment in Mexico and catastrophe in Argentina.
Sub-Saharan Africa has also failed to yield benefits and the population lives in extreme
poverty. This means open world markets outcome is not universal and not easy to implement. They
claim there is a huge gap between the world rich and poor which is caused by Globalization.
Wolf says Globalization may improve income and living standards but the results may vary if
obstacles exist such as poor governance or excessive borrowing.
Globalization has had a deleterious effect on labor and labor standards
Globalization means that measures to keep a country’s industry within its borders have been
reduced. Companies, therefore, have an easier time divesting their interests in one country and
moving to another. In developed countries, workers complain that their jobs will migrate to
developing nations where there are lower standards thus cheap labor. This led to a loss of jobs as
industries closed down.
Although labor standards in developing nations are lower than in developed nations, they are
on the rise. Evidence shows that they pay higher wages, create new jobs at a faster rate and spend
more on research and development. To developing nations the more demand for higher labor
standards is a barrier to free trade. Developing countries may feel that the lower cost of labor is
their competitive advantage and that more stringent labor standards may discourage companies
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from investing in their countries. This will damage their prospect for improved economic
development.
Globalization has contributed to a decline in environmental and health conditions
Globalization has brought about pollution. The anti- globalization claim that the investors have
a possibility of moving their highly polluting activities to nations that have the least environmental
regulations. There’s extra use of resources and the generation of waste. Globalization
psychologically may create xenophobia (fear) due to constant contact with foreigners which may
create greater dislike of the outside world.
Characteristics Of Globalization
1. shrinking space
2. shrinking time
3. disappearing borders
4. new markets
5. new tools of communication
6. new actors
7. new rules and norms
New Markets
There is growth in global markets in services such as banking, insurance, and transport. New
financial markets, which are deregulated and globally linked are working around the clock. There
is also growth in mergers and acquisitions and an increase in global consumer markets with global
brands.
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New Tools of Communication
Development of internet and electronic communication which links many people
simultaneously, cellular phones and mobile telephony, fax machines, faster and cheaper transport
by air, sea, rail, and road. There’s also the coming of computer-aided design and manufacturing.
New Actors
Multi-national corporations have integrated their production and marketing dominating world
production. The World Trade Organization was the first multi-lateral organization with the
authority to force national governments to comply with trade. There’s also a growing international
network of non-governmental organizations (NGOs). Regional blocks have been formed which
are gaining importance e.g., the European Union, an association of southeast Asian nations, South
Africa development community, the East African Community, etc. There’s also the development
of more policy coordinating groups e.g., G7, G8, IMF & WORLD BANK.
New Rules and Norms
Market economic policies are spreading around the world. There’s privatization and
liberalization than in earlier years. There’s widespread adoption of democracy as the choice of
political regime, as well as consensus goals and action agenda for development—e.g., millennium
development goals. There are agreements on global environmental conservation e.g., the O-Zone
layer, and disposal of hazardous waste, desertification, and climate change.
PROCESS OF INTERNATIONALIZATION (International market entry)
Before companies become Multi-National, they begin usually as small companies with only
domestic experience. Modes of market entry include;
1. non-equity-based mode of entry which includes
a) Exports—direct &indirect
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b). Turnkey
c) licensing
d) contract
2. Equity-based mode of entry
a) Wholly owned subsidiary
b) Joint venture
c) Strategic alliance
d) Merger and acquisition
NON-EQUITY MODE OF ENTRY
a) Import-Export
Importing and exporting of goods is the simple practice of producing goods in one country for
sale or consumption in another country. The country from where the goods originate (or are
produced) is called the Exporting Country. While the country of destination (or purchase) for such
goods is called the Importing country. The entities engaging in such trade are come to be known
as Importers & Exporters. This is the most fundamental and straightforward form of business when
discussing the types of international business.
Exporting is the easiest way to sell and produce in an international market. It requires little
investment and is relatively free of risk. It’s an excellent means of getting a feel of international
business without committing a great amount of human or financial resources. Management
involved in exporting can choose between direct and indirect exporting. It can also consider the
use of non-equity options like licensing and franchising
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Export based internationalization:
 Indirect export: This is the export of goods and services through various types of homebased exporters. Or its exporting goods through intermediaries or agents. It's simpler
because it does not require special expertise or large capital and it’s done by exporters
based in the home country. These home-based exporters are referred to differently
1. Manufacturers export agents who sell for manufacturers
2. Export commission agents who buy for their overseas customers
3. Export merchants who purchase and sell for their accounts
4. International forms who use the goods overseas
Indirect exporters however pay a price for such services. They pay a commission to the
agents.
 Direct Export: In direct exporting, the company has direct contact with customers in the
foreign market. It’s defined as exporting of goods and services by the producing firm. An
organization can decide to establish an export department to deal with sales. The Internet
has made direct exporting much easier because an exporter can make his products first
known abroad before exporting them and source for customers before exporting. Direct
export requires the use of foreign sales representatives or distributors overseas. As exports
increase the company may require to have a branch or offices in the foreign country
Advantages
To Importer--An importer has access to a greater range of raw material and inputs thanks to the
opening of cross-border trade. He can purchase high-quality and low-cost goods from a country
that specializes and is highly efficient in production. This aids him in drastically driving down the
costs and enhancing profits.
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To Exporter--An exporter can create greater market potential for his products by being able to
reach customers beyond borders. The customers of an exporter are also such that they normally
purchase in bulk quantities and will pay a significantly higher price when compared with a
domestic buyer. The exporter is thus able to harness such amounts of profit that would not be
possible by just selling in the home country.
Disadvantages
To Importer--While importing may greatly benefit an individual businessman, it has a grave
impact on the economy. Importing causes a huge dent in the domestic markets of the importing
country. Local players suffer greatly at the cost of multi-national corporations expanding
worldwide. This inequality leads to a negative balance of payment (Export turnover – Import
turnover) that impacts the currency exchange rates. Therefore, government intervention in such
businesses is very high. The importers are often subjected to high rates of duty and taxes to create
an even playing field with the domestic players.
To Exporter--An exporter must be prepared for risks that accompany dealing with an overseas
market. Lack of familiarity with the foreign language, consumer patterns, market behaviors stands
in the way of seamless business understanding. It is also difficult to retain control and ownership
of markets in an overseas land. Competition may emerge from anywhere and it shall be difficult
for the exporter to anticipate it. Moreover, the exporter must ensure compliance with the laws and
regulations of both countries. This in itself is an arduous task.
b) Turnkey Projects
A turnkey project is amongst the types of international business where a firm fully designs,
constructs, and equips a production or service facility. The project is handed over to the purchaser
upon completion. The project is handed over in such a ready and up-to-date state that the purchaser
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just has to “turn the key” to bring the facility to ignition. Turnkey projects are generally carried
out as an agreement between one business belonging to a developed country and the other to a
developing country. The former brings to the table advanced production technology, know-how,
and economies of scale. This enables a business in a developing country to thrive and prosper with
little assistance from first-world countries.
Advantages
A design and construct project involves multiple contractors working on a single project.
On the other hand, having a turnkey vendor on board means a single point of contact for the
plethora of sub-contracts that go into the construction of a single contract. The purchaser is much
more comfortable since he can hand over the complete execution to the vendor. Moreover, turnkey
vendors are masters in their field. They provided the added benefit of lower costs due to the
economies of scale they experience.
Disadvantages
The turnkey vendor has no specific interest in the project apart from its completion. The
vendor will not be present when the plant is operationalized on a day-to-day basis. Because of a
lack of long-term interest, the vendor may be casual during the construction phase. This may cause
him to overlook small slip-ups here and there. Also, since the project is handled by the vendor
from start to finish, the purchaser is not made a part of the process. He will not have acquaintance
with how his plant works once the control is handed over to him. This may lead him to face several
difficulties in the smooth running of operations post-handover.
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c) Franchising
It’s a form of licensing in which one firm agrees with another to operate a certain type of
business under an established name according to specific rules. Firms have gone overseas with this
kind of licensing. International franchising refers to the transfer of a right to carry on business
under a particular name for the sale of specific goods or provision of services. An established brand
name and a customer base are often perquisites for enabling a brand to turn into a franchise. The
franchisor (owner of the brand) makes available to the franchisee, the brand name, trademarks,
know-how, etc. to produce specialized goods and services, operating models along with the
complete business model. In return, the franchisor receives regular royalty payments subject to
terms of understanding between both parties. An example of companies operating under franchise
is McDonald, KFC, Pizza Hut intercontinental hotel Serena hotels, etc.
Advantages
A franchise model is ideal for individuals who want to set up their own business but not
start from scratch. Such a business provides huge leverage to the franchisee in terms of an
established brand value and existing awareness amongst customers. The franchisees almost get a
ready customer base reducing the risk of market capture. Also, the franchisers come with a readymade operating catalog that covers every angle of the business. The franchisee, therefore, does not
have to worry about the nitty-gritty of setting up a brand-new business.
Disadvantages
A franchise agreement remains binding for some time. Therefore, even if the business does
not become profit-making, the franchisee will have to continue to run it at a loss during the life of
the contract. Also, most franchise agreements are on a fixed royalty plus profit sharing basis. The
franchisee, therefore, must part with a significant portion of his profits. Moreover, the terms of the
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agreement are very tight and prescriptive. This leaves little room for the franchisee to innovate or
add his spin to the venture.
d) Licensing
It’s a contractual arrangement in which one firm grant access to its trade secrets or technology
to another for a fee. By licensing agreement one firm (licensor) will grant another firm (licensee)
the right to use any kind of expertise such as
1. The manufacturing process (patent)
2. Marketing procedures
3. The trademark for one or more of the licensor's products.
The licensee pays a fixed sum when signing the agreement. Throughout the contract, the
licensee pays a royalty of 2-5% of sales. In the past licensing was not a source of income for
international firms but in recent times it has changed. This is because initially companies only
made agreements that were illegal and this made it difficult for the courts to solve cases when the
agreements were violated. Piracy also increased. Licensing was therefore legalized and companies
are making a lot of money for selling technology through licensing.
In the fashion industry several designers license the use of their names e.g., Pierre Cardin is
one of the largest licensors reporting 900 licenses in more than 150 countries in several items in
2010. These licenses earn the company $75 million annually. Despite being able to earn a sizeable
income from licensing, many firms especially those that produce high-tech products will not grant
licenses. They fear that a licensee will become a competitor upon the expiration of the agreement.
Or they will seek to market the product outside its territory.
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e) Management Contract
This is an arrangement under which one firm provides management in all specific areas to
another firm. This is done for a fee depending on the sales. International companies make such
contracts with a firm which they have no ownership e.g., Hilton Hotels provides management for
non- owned overseas hotels that use the Hilton name. Delta provides management assistance to
foreign or other airlines.
f) Contract Manufacturing
This is an arrangement in which one firm contracts with another to produce products to its
specifications but assumes responsibility for marketing. International firms employ contract
manufacturing in two ways:
1. Through entering a foreign market without investing in a plant facility—the firm contracts with
a local manufacturing firm to produce products as per its design. The firm markets its products
under its brand name i.e., producing using the firm’s label
2. Sub-contracting assembly work or production to an independent company overseas. The
international firm will lend capital to the foreign contractor to help in its production. The
advantage of sub-contracting is that the host country will create employment and foreign
exchange since it will be exporting.
EQUITY MODE OF ENTRY:
When management decides to make a foreign direct investment, it usually has several alternatives
available. They may not be all visible in a particular country but they include
1. Wholly owned subsidiary
2. Joint venture
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3. Strategic alliances
4. Merger and acquisition
5. Foreign direct investment
a) Wholly Owned Subsidiary
A company that wishes to own a foreign subsidiary overseas may:
1. start from the ground up by building a new plant (green investment)
2. Acquire a going on concern
3. Purchase its distributor—thus obtaining a distribution network familiar with its products—
here production facilities have to be built. Firms making foreign direct investment have
preferred wholly-owned subsidiaries but have not shown a marked preference for any of
the three means of obtaining them.
Foreign investors in the USA have demonstrated a general preference for acquiring going
concerned with the instant access to the market they provide. They also have no competitors after
purchase. Sometimes it’s not possible to have a wholly-owned subsidiary because the host
government may not permit it.
b) Joint Venture
It’s a cooperative effort among two or more organizations that share a common interest in a
business undertaking. It creates a new identity in which both initiating partners take active roles in
formulating strategies and making decisions. A joint venture may be:
1. A corporate entity formed by an international company and local owners
2.
A corporate entity formed by two international companies to do business in a third market
3. An entity formed by the government agency and an international firm
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4. A cooperative undertaking between two or more firms of a limited duration project e.g., large
construction of a dam, road an airport, etc.
Forming a joint venture allows partners to avoid making an expensive and time-consuming
investment of their own. It helps to avoid dangerous competition with another company. When the
host country requires that companies have local participation, foreign firms must engage in joint
ventures with local owners to do business in that country. Sometimes however foreign firms will
seek local partners even when there’s no local requirement to do so. A large number of people in
many developing countries dislike multi-national for exploiting them, although they still feel that
foreign product is superior to those of purely local firms. The solution to this is a joint venture
where local partners are highly visible.
Strong nationalistic sentiments may cause foreign firms to try to lose their identity by joining
with local investors. Other factors that influence companies to enter joint ventures are:
1. Ability to acquire expertise that is lacking
2. Special tax benefits some governments extend to companies with local partners
3. The need for additional capital and experienced personnel
4. Some companies enter joint ventures to reduce investment
5. Others join together to achieve economies of scale
A joint venture marks the strategic alliance of two or more companies situated in different
countries. Amongst the various types of international business, an international joint venture offers
the benefits of mergers while still allowing to retain control and ownership. An international joint
venture is also a viable option for a business that seeks to expand into foreign territory and offload
the entailing risk of unknown markets. Such joint ventures are normally entered into by companies
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where one sits in the country of operations or production and the other sits in the country where
goods are primarily sold.
Advantages
Entering a joint venture means gaining ready access to a foreign market. You can count on
the reputation and brand of the partner to provide you with the necessary kickstart and leverage
with a new customer base. Conversely, the other partner also reaps benefits such as products with
advanced technology and lower cost of production. A joint venture also ensures simplicity in
compliance with statutory regulations since each partner must look after the legal requirements of
only his home country.
Disadvantages
It is difficult to identify companies that would provide the synergies and leverage one is
looking for. A strategic joint venture is one that perfectly aligns the strength and weaknesses of
the parties involved to the benefit of both. Even if one does narrow down to an ideal partner for a
JV, there remains a question of getting on board the other party. Also, joint ventures are high-profit
and short-lived forms of business. This may cause the companies to shift their focus from the main
business causing permanent damage.
c) Strategic Alliances
These are partnerships between competitors’ customers, suppliers, that may take one or more
forms. many firms form strategic alliances due to the growing cost of research, product
development, marketing, need to move faster in carrying out global strategies. The strategic
alliance aims to achieve faster market entry and startup., gain access to new products, technology,
gain market access, cost-share and risk.
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Pooling alliances(consortia); These involve bringing together different companies to pool
resources into an integrative organizational design e.g., keiretsu—which is a Japanese Consortia
where 20 to 25 companies integrate. They have common bank holdings, close personal ties, and
even management.
Chaebols which are Korean consortia and are similar to Japanese
d) Mergers And Acquisition
These are not considered alliances as such however both are ways for firms to get their hands
on new technology by acquiring or working with smaller innovative firms. Many a time mergers
or acquisitions occur when both are struggling to survive. Many alliances fail or are taken over by
one of the parties. Alliances are difficult to manage because
1. Partners are often competitive as well as have differences in strategy.
2. Differences in operative practices
3. Differences in organizational culture
Alliances have not yet accomplished what they were set to accomplish. It seems therefore that
alliances in their various form will continue to be used as important strategic and tactical weapons
due to their challenges facing companies involved in international business.
e) Foreign Direct Investment
It can be divided into two:
1. Portfolio investment---which is the purchase of stocks and bonds to obtain a return on the funds
invested.
2. Direct investment is where investors participate in the management of the firms, in addition,
to the return on their money. In foreign direct investment companies own and control directly
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a foreign operation. This investment is in real items e.g., land building, equipment, and
organization.
It can take various forms;
 Greenfield organization where an entirely new foreign operation is established.
 Merger and acquisition of an existing organization.
Most experienced international firms choose foreign direct investment because of
i.
Growth control
ii.
Lower cost of supplying host country
iii.
Avoiding import quota
iv.
It’s a greater opportunity to adopt the product to a local market
v.
Better local image of the product.
Disadvantages of foreign direct investment
1. It increases capital investment
2. Increases investment of managerial and other resources
3. There’s greater exposure of the investment to political and financial risk
WHY INVEST ABROAD
1. Supply factors
a) Production cost
b) Distribution costs e.g., the greater the bulk of product the more imports it is to invest
in production close to the final market to reduce transport cost
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c) Availability of natural resources e.g., oil, natural gas mineral deposits, etc. stimulate
foreign investors
d) Access to key technology – investing in overseas expertise as in parks etc.
2. Demand factors
a) Market-oriented multi-national
b) Saturation of the home market
c) Demand from business customers now abroad etc. Japanese car component supplies
going to E.U to support car companies in the European Union.
d) Avoidance of trade barriers
e) Economic development incentive, e.g., government provision of low or zero taxes,
lighter regulation.
f) Motivation of organization
 Market seeking
 Efficiency seeking
 Resource seeking
g) Band wagon effect- following what other foreign investors are doing
h) International product life cycle
New product stage
Matured stage product stage
Standardized product stage
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THEORIES OF INTERNATIONALIZATION (INTERNATIONAL TRADE)
International trade theories attempt to address why nations trade. They also attempt to predict the
directions, composition, and volume of goods traded. These includes:
a. Mercantilism
b. Theory of absolute advantage
c. Theory of comparative advantage
d. Heckscher- Ohlin theory of factors endowment
A. MERCANTILISM
 It evolved in Europe between 16th and 18th century
 It was viewed as the accumulation of precious metals as an activity essential to a nation’s
welfare
 According to mercantilists view, these metals were the only source of wealth
 Because England had no mines the mercantilists looked at international trade to supply
gold and silver
 The government, therefore, established economic policies that promoted exports and stifled
imports
 This led to a trade surplus which was to be paid for in gold and silver
 Import restrictions such as import duties reduced imports while government subsidies to
exporters increased exports
 Mercantilism also led to the generation of benefits for certain economic groups such as
domestic mechanism, artisans, and shippers at a cost to other groups such as consumers
and industrialists (paid more)
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 The mercantilist era ended in the late 1700 but its arguments live on.
 This is because many people still believe that exports are good for a country. After all, they
create jobs.
 Imports are bad because they transfer jobs from a person’s country to other nations
 This view sees trade as a zero-sum activity where one party must lose for another to gain.
 A favorable trade balance today still means a nation that exports more goods and services
than it imports.

According to the balance of payment accounting an export that brings money to the
country is termed positive but imports that cause loss count flow are labeled negative
 Managers in the US and Europe believe that Japan because of its protectionism remains a
present-day fortress of mercantilism that raises barriers to import goods while giving
Japanese exporters an unfair advantage.
 These managers are concerned that Japan’s barrier to their imports are due to their
traditional pre-occupation of self -sufficient and a “US against them” mentality
 A U.S.A secretary of commerce once said “they tell us they have not protected their market
because of their culture”
 They haven’t joined the world yet a Japanese comment confirms that “the public is not in
favor of a perfect market. We would like to preserve our culture.”
 If we move to free trade, we may lose Japanese virtue in the process. Japan has continued
to do this by maintaining a cheap Yen to capture attractive export markets while reducing
threats of imports. In 2004 bank of Japan spend 15 trillion Yen to push the Yen down
against the US dollar
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 A weak Yen will provide Japan with a cost advantage over European or American
competitors
 China- has resisted the effort to revalue its currency instead it continues to hold its currency
Yuan within the tight trading range relative to the US dollar
 By not allowing the yuan to appreciate in value against the dollar the Chinese are accused
of engaging in mercantilist behavior.
 They help Chinese companies through this to have an advantage against other nations.
 Mercantilism- An economic philosophy based on the belief that (1) nations wealth depends
on the accumulated treasure –gold (2) increase wealth government policies should promote
exports to discourage imports
B. THEORY OF ABSOLUTE ADVANTAGE
 It was developed by Adam Smith
 He was against mercantilism views
 He claimed that market forces, not government control should determine directions,
volume, and composition of international trade.
 He argued that under free unregulated trade each nation should specialize in producing the
goods it could produce. Most efficiently (for which it has the absolute advantage (either
natural or acquired)
 He said that some of these goods would be exported to pay for imports of goods that could
be produced more efficiently elsewhere.
 By this Smith said, both nations would gain from trade.
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 Smith was for the idea that each nation should use its resources to produce only the products
at which it is more efficient (specialization)
 This specialization increases production which will lead to surplus.
 The countries will agree (take mid-point of the trading limits) to share equally the benefits
of trade by agreeing to exchange the surplus.
 Smith helped to convince many governments to dismantle trade barriers and encourage
increased international trade. However, it failed to calm the concern of those whose
countries lacked an absolute advantage.
 Absolute advantage theory, therefore, states that a nation has an absolute advantage when
it can produce a large amount of a good or service for the same amount of inputs as can
another country or
 When it can produce the same amount of a good or service using fewer inputs than could
another country.
C. THEORY OF COMPARATIVE ADVANTAGE
It was developed by David Ricardo in 1817
 He demonstrated that even though one nation held an absolute advantage over another in
the production of each of two trades could still create benefit for each country.
 This will make both countries win or gain from engaging in the trade.
Comparative advantage theory thus states that a nation having an absolute disadvantage in the
production of two goods concerning another nation has a comparative or relative advantage in the
production of goods in which its absolute disadvantage is less, e.g.,
39
America
China
Soya beans
4
5
Cloth
2
6
China in this also has the advantage of both but America has absolute advantage of soya beans and
disadvantage in cloth. Each country should agree on the exchange rate of these items
D. HECKSCHER –OHLIN THEORY OF FACTOR ENDOWMENT
 Developed by Ohlin
 In this theory, Ohlin states that international and inter-regional differences in production
costs occur because of differences in the supply of production factors. The goods that
require a large amount of a nation abundant (thus less costly) factor will have lower
production costs enabling those goods to be sold for less in international markets
e.g., India is relatively endowed with labor as compared to Germany. It should therefore
concentrate on producing labor-intensive goods
 Germany with relatively more capital than labor should specialize in capital intensive
products
 When these countries trade, each will obtain at a lower price those goods that require
large amounts of the production factor that is relatively scarce in their own country and
both will benefit from the transactions
 Heckscher Ohlin's theory of factors endowment states that countries export products
requiring large amounts of their abundant production factors and import products that
require a large number of their scarce production factors.
40
How useful is this theory in explaining present-day trading patterns in the US?
i.
Trading patterns generally corresponds fairly to Ohlin’s theory
ii.
Countries with relatively large amounts of land (Australia) do export land-intensive
products e.g., grain, cattle)
iii.
Countries with relatively large populations e.g., (Indonesia and Bangladesh) export
large labor-intensive goods.
The Leontief Paradox:
Paradox –a situation with two opposite features
The statement contains 2 opposite ideas that make it seem impossible, unlikely, or probably true.
In 1952 an economist Wassily Leontief made his study which disputed the usefulness of Ohlin’s
theory, as a predictor of the direction of trade. This study is referred to as the Leontief paradox.
 Leontief found out that the U.S.A which is one of the most capital-intensive countries was
exporting relatively labor-intensive products in exchange for imports of relatively capitalintensive products.
 Economists believe that this occurred because the USA exports technology-intensive
products made by highly skilled labor requiring large capital investment to educate and
train them.
 The USA also imports goods made with mature technology requiring capital-intensive
processes operated by unskilled labor.
 The international structure of trade barriers could also explain Leontief’s result.
 Leontief most imports outcome is the recognition of the differences in labor (i.e., some
labor is skilled and unskilled)
 The productivity of these two groups can be quite differently
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 These factors can help explain the level and directions of trade.
Shortcomings of Factor-Endowment Theory
1. Ohlin also ignored transport costs. There are goods for which freight charges are so high that
the end price is greater than the cost of a locally made product leading to little trade.
2. There is also the issue of domed by the customers because of taste which enables trade to flow
in a direction completely different to the one predicted by the theory- Ohlin
3. Differences in cultures, climates, income levels, and population structures can produce
diversity in preferences thus influencing trade patterns
4. Nations' comparative advantage can be affected by differences between the cost of production,
factors in that country’s currency, and their cost in other currencies. This changes also the
direction of trade.
How money can change the direction of trade
To determine whether it’s more advantageous to buy locally or import the traders need to
i.
know the prices in their own currencies.
ii.
The convert from foreign to the domestic currency they use the exchange rate.
iii.
The exchange rate is the price of one currency stated in terms of another currency
iv.
The exchange rate can influence the decisions exporters can take concerning their trade.
For example, On 26th July 2005, the US dollar traded at a rate of 1.207 to the Euro. By May
2008 the dollar had decreased in value reaching 1.577 Ren Euro. The European companies were
pressurized to decrease the prices of their exports to the United States to maintain their market
share. This change in the currency could enhance competition leading to loss of market.
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v.
Another way a nation can attempt to regain competitiveness in the world market is through
currency devaluation i.e., lowering its currency price in terms of other currencies. This
action leaves domestic prices largely unchanged.
For example, to fight inflation, the government of Argentina decided to set a fixed exchange
rate of I peso to US Dollar. This action managed to bring financial stability to Argentina and also
made it the world’s most expensive economies for doing business. Many people blamed the
situation on a recession that had dragged on since 1998 and had resulted in high unemployment.
This had to unrest and widespread rioting which made the Argentina president resign from office.
The interim government which took over abandoned the decade-old fixed exchange rate policy.
Immediately the Peso experienced a dramatic and sudden devaluation decline from 21 to only 27
cents with 5 months. Imports became expensive and exports became attractive within a year.
Increased domestic investment and production replaced imports. Unemployment was cut in half.
Gross domestic product increased in 3yearsinto half. The gross domestic product increased in
3years.
OTHER NEWER THEORIES (EXPLANATIONS OF INTERNATIONAL BUSINESS)
1. Linder theory of overlapping
 It was developed by Stefan Linder
 He was a Swedish economist
 His theory state that customers tastes are strongly affected by income levels
 According to him, a nation’s income per capital level determines the kinds of goods it will
demand
 Goods produced for domestic consumption will eventually be exported due to similarity of
income levels and demand in other countries
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 Linder concludes that international trade in manufactured goods will be great in nations
with similar levels of per capital income than those with dissimilar levers of income
 In this case, the goods that will be traded are those for which there is an overlapping
demand (customers in both countries are demanding the same goods)
e.g., if an American company such as Apple invest a sophisticated cellphone with advanced
features for its home market, the best will be other advanced countries like Japan and
Europe even if these countries have their own produces of cell phone
2. International Product Life Cycle (IPLC)
 This theory was formulated by Raymond Vernon in the 1960s in response to Heckscher
Ohlin's failure to explain patterns of trade.
 It concerns the role of innovation in trade patterns
 He views products as going through a full life cycle
These stages are:

New product development stage

Matured product stage

Standardized product stage
 The international life cycle is a theory that explains why a product that begins as a nation’s
export eventually becomes its import
 When a product is first introduced in a particular country it sees rapid growth in sales
volume because market demand is unsatisfied
 As more and more people who want the product by demand and sales levels off
 When demand has been satisfied products sales decline to the level required for product
replacement.
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 International business product lifecycle accelerates due to the presence of follower’s
economies that rarely introduce innovations but quickly imitate the success of others.
 They introduce low-cost versions of the new product and precipitate a faster market
saturation and decline.
New product stage:
At this stage, a company produces a new product and takes it to the local market
 The manufactures or the company searches for market and finds a better way of satisfying
the customer needs
 Competition at this stage is low.
 Sales volume grows rapidly.
 This stage is characterized by:
i.
High prices
ii.
High profits
iii.
Wide promotion of products
 International followers have no time to develop imitations
 The suppliers of the products start exporting it even into follower economics
Maturity Stage:
In the maturity phase of the product life cycle, demand levels off and sales volume increases
at a slower rate.
 Imitations appear in foreign markets and export sales decline
 The original supplier may reduce prices to maintain market share and support sales
 Profit margins decrease but the business remains attractive because the volume is high
and costs are lower.
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Decline (standardized product stage):
In the final phase of the product life cycle sales, volume decreases, and many such products
are eventually phased out and discontinued
 The followers’ economies have developed imitations as good as original products and
can export them to the original suppliers’ home market further depressing sales and
prices.
 The original suppliers can no longer produce the product competitively but can
generate some returns by cleaning out the inventory and selling the remaining products
at discounted items prices
3. Technology Life Cycle
 The initial stage involves the development of new technology in an industrialized
country.
 The technology is used in the innovative country and exported to other developed
nations with high-cost labor.
 This technology may not be a risk exported to developing nations because the existence
of low-cost labor in these countries would make the use of the new technology too
capital intensive.
 With time the increasing cost of labor in the industrialized country reaches a point
where it’s no longer profitable to use the technology in that nation.
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 At the same time, labor cost in developing nations rises to a stage where technology
can be profitably employed
 The technology becomes an export from the industrialized nation to the developing
nation.
 Later a technology is developed for domestic use in the developing nation for the
international market and is exported.
4.
Economies of Scale and The Experience Curve
 In the 1920s economists began to consider the fact the most industries benefit from
economies of scale
 That is as a plant gets larger and output increases. The average cost of producing each
unit of output decreases. This occurs because
i.
Large and more efficient equipment can be employed
ii.
Companies can obtain volume discounts on their large purchases
iii.
Fixed costs such as those of research and design and administration can be
allocated over a large quantity of output.
iv.
Production cost also drops due to the learning curve.
 This is the case where as firms produce more products, they learn ways of improving
production efficiency causing production costs to decline
 Economies of scale affect international trade because they can permit nations'
industries to become low-cost producers without requiring the nations to use other high
production factors.
 These nations will therefore specialize in the production of a few products and trade
with others to supply their other needs.
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5. Imperfect Competition
 It was developed by Paul Krug man
 He developed a model that helps to explain the observed levels of intra-industry trade
between nations.
 Intra-industry trade refers to a situation where a country exports certain items from a
given product range while at the same time importing other items from the same
product range. For example, U. K exporting certain types of a car to Germany but
importing other types of cars from Germany.
 Krugman reasoned that the production of goods is concentrated geographically due to
economies of scale
 He also reasoned that some factors associated with resource constraints cause
companies in other identical nations to produce some unique varieties of products to
avoid direct competition.
 The existence of this product differentiation (creating a separate identity of product
through styling /perception)
 Image differences, which are supported by advertising to encourage brand loyalty is an
important element in Krugman’s model
 Due to the differentiation of produces companies act like monopolies making more
firms and more varieties of goods present in the market
 Since firms from different countries produce unique varieties and
 Consumers in each nation buy a volume of each variety then intra industry trade, is
taking place
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 This model helps to explain the high proportion of intra-industry trade in the overall
international trade e.g., computers, phones
6. First Movers
 A pattern of trade according to this theory of first movers may be determined by
historical factors e.g., which countries entered the market first.
 Some management theorists argue that firms that enter the market first (first movers)
will be able to gain a large market share, enabling them to gain benefits such as reduced
cost, improved technical expertise
 This can discourage foreign entrants that might have to enter at a higher cost.
 A study done across a broad range of industries shows that 30% of the market is held
by first movers and 70% of the leaders in the present-day market were first movers
7. National Competitive Advantage from Regional Clusters
 National competitiveness involves a nation ability to design, produce, distribute, or
service products within an international trade context while earning increasing returns
on its resources
 The nation’s ability to achieve sustained international success within a particular
industry is explained by variables
 Alfred Marshall seminal thesis work on economic theory helped to explain why in
many industries firms tend to cluster together on a geographic basis
 He suggested that geographical cluster appears for 3 reasons
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i.
Advantages associated with pooling of common labor force so that staffing
requirements can be met quickly
ii.
Gains from the development of specialized local supplies whose operations and
skills can be coordinated with the needs of buyers.
iii.
Benefits that restrict the geographic region from sharing of technological
information and innovation
iv.
Michael porter extended the work of Marshall through his Diamond Model
v.
He said that 4 kinds of variables have an impact on the ability of local firms to
utilize a country’s resources to gain a competitive edge.
a. demand conditions i.e., the nature of domestic demand
 If a firm’s customers are sophisticated and demanding it will strive to produce high
quality and innovative products ---will have a global competitive advantage over
companies located where domestic pressure is less.
b. Factor condition: i.e., Level and composition of factors of production
 Here porters distinguish between basic factors and advanced factors (nation’s
infrastructure- i.e., telecommunication, transport system, or research)
 He also distinguishes between created factors –an investment made by individuals,
company or governments and Inherited factors (natural resources location)
 He said that lack of natural endowment has caused nations to invest in the creation of
advanced factors (e.g., education workforce, free ports, and communication system) to
enable their industries to be competitive globally
c. Related and supporting industries i.e., suppliers and industry support
services
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 For long time firms and their suppliers have tended to cluster in a given location without
any apparent reason- Caribbean nations have upgraded their communication system to
attract banking that has no basic factor production.
 Yet these supporting industries for competitive success by providing a network of
supplies and commercial infrastructure e.g., San Francisco buy areas has a range of
related supporting industries for personal computer industry e.g., intellectual property
right lawyers, scientific equipment electronics (e.g., mp3 players, Personal digital
assistants), software developers, and wide range of internet companies
d. Firms’ strategy structure and rivalry i.e., the extent of domestic
competition
 Existence of barrier to entry
 the firm’s management style and organization
 porter says that companies facing heavy competition in their domestic markets are
always striving to improve their efficiency and innovativeness
 This makes them more competitive internationally
 Firms that produce the same products have carefully watched their competitors every
more and have entered foreign markets because their competitors have gone there, e.g.,
Japanese’s automakers such as Toyota, Honda, Nissan, and Mitsubishi have competed
with each other for decades constantly pressurizing each other to improve the quality
and performance of their products or else risk the loss of market share
 This competition has enabled these firms to develop world-leading capabilities in auto
design and manufacturing.
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 If one company enters a new international market the competitors tend to be close
behind it to avoid the decline in their international competitiveness.
 Porter also claimed that competitiveness could be affected by government and chance
e.g., competitiveness could be influenced through government policies such as
incentives, subsidies temporary protection from foreign competitors’ infrastructure
development, or random events such as location and timing or research breakthrough
or lick.
 To Porter, these factors are related to creating a virtuous circle of well as meeting the
demands of customers
Critics of porter
i.
John Dunning claims that there is nothing new in porter’s analysis.
ii.
His evidence is not based on rigorous empirical research
iii.
Competitiveness applies to companies rather than nations
iv.
Although nations specific factors can provide a critical foundation for creating and
enhancing competitiveness at the national level.
Porters Diamond (variables affecting competitive advantage)
Firm strategy Structure and
Rivalry
Factor conditions
Demand Conditions
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Government
His work complements one of Riccardo’s and Heckscher Ohlin
Summary of international trade theory
1. International trade occurs primarily because of relative price differences among nations
2. These differences emanate from differences in production cost which result from:
i.
Differences in the endowment of factors of production
ii.
The difference in levels to technology that determines how the factors are used
iii.
Differences inefficiencies with which these factors are utilized
iv.
Foreign exchange rate
3. However, taste differences, a demand variable can reverse the direction of trade predicted
by the theory
4. International theory shows that nations will attain a higher level of living by specializing
in goods which they possess a comparative advantage and import those they don’t have a
comparative advantage
THEORIES OF INTERNATIONAL FOREIGN INVESTMENT
These are theories of foreign direct investment which involves both ownership and control of
international investment and physical assets.
They include:
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1. Monopolistic advantage theory
2. Market imperfections
3. Financial factors
4. International products life
5. Follow the leader
6. Cross investment
7. Internalization theory
8. Dynamic capabilities
1. Monopolistic advantage theory
 Developed by Stephen Hymers in 1960
 He shows that foreign direct investment occurs in oligopolistic industries possessing
technical and other advantages over indigenous firms
 They possess these advantages not with other firms to overcome liabilities associated with
being foreign such as knowledge about local markets conditions
 The increased cost of operation at a distance
 Differences in culture, language laws, and regulations
 That makes foreign companies be at a disadvantage against local firms
 According to Hymers, these advantages include:
Superior technology

Superior knowledge in marketing

Superior knowledge in management /finance
2. Market imperfection
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 Caves expanded Hymen's work to show that superior knowledge allows the investing firm
to produce differentiated products that consumers would prefer to local goods.
 These goods will give the firm some control over the selling price
3. Financial factors
 Aliber believes that the imperfections in the foreign exchange market may be responsible
for foreign investment
 Companies in nations with overvalued currencies are attracted to invest in countries whose
currencies are undervalued.
 Another financially based theory called portfolio theory suggests that international
operations allow for a diversification of risk.
4. International products life cycle
 Foreign direct investment is a natural stage in the life of a product.
 To avoid losing market that is served by exporting a company is forced to invest in
overseas production facilities when other companies begin to offer similar products
 It should locate in countries where the factors of production are less expensive
5. Follow the leader
 Developed by Knickerbockers
 He noted that when one firm especially the leader in an oligopolistic industry entered a
market another firm in the industry follow.
 Competitors invest because they avoid losing market
 Fear that the initiators will achieve some advantage
 Suspecting initiator knows something they do not know and feel it’s better to be safe than
sorry
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6. Cross investment
 Graham noted a tendency for cross investing
e.g., if European firms invest in the USA, then the USA goes to invest in Europe
 They believed they would retaliate in each other’s country if the other initiated some
aggressive tactics such as price cutting etc.
 It’s a defense mechanism
7. Internalization theory
 This is where a firm has superior knowledge but due to inefficiency in external markets
(cost of transaction) firm may obtain a higher price for their knowledge by using the
knowledge itself instead of selling it in the open market.
 The company will invest abroad for activities such as supply production or distribution.
The company will send knowledge out while maintaining the knowledge within the firm
 The company can realize the superior return on investment
8. Dynamic capabilities
 This theory argues that ownership of specific knowledge or resource is necessary.
 But it’s not enough for achieving success in foreign direct investment.
 The firm must be able to effectively create and exploit these capabilities and transfer them
to the international environment to produce a competitive advantage
DUNNING ECLECTIC THEORY OF INTERNATIONAL PRODUCTION
 Most widely accepted theory of foreign direct investment
 It was developed by Dunning
 This theory provides the framework that explains why firms choose foreign direct
investment instead of serving foreign markets through export, licensing, joint ventures, etc.
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 It states that if a firm has to invest in production facilities overseas it must have 3 kinds of
advantages
a) Ownership specific advantages
 How a firm can develop a firm’s specific advantage through ownership of tangible assets
that are not available to other firms and can be transferred abroad.
 The 3 basic tangible or intangible owner specific advantages included

Knowledge of technology

Economies of scale

Monopolistic advantages
 The advantage generates high revenues which will offset added operation costs due to
distance with a foreign location
b) Location-specific advantages
 A foreign market must have a specific characteristic of an economic, social, or political
nature (e.g., market size, tariff or non-tariff barriers or transport cost) that will enable the
firm to exploit its specific advantage by locating to that market rather than serving it
through exploits.
c) Internalization advantages
 It’s the firm’s best interest to explain its owner-specific advantage through internalization
in those situations where either the market does not function efficiently or does not exist.
 This theory is called OLI Model. It states that a firm must have both location and
ownership advantage to invest in a foreign country.
 It will invest where it is most profitable to internalize its monopolistic advantage
Explain some of the theories of foreign direct investment
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BARRIERS TO INTERNALIZATION (Shortcoming to internalization)
1. Inadequate quantity and/or untrained personnel for internalization
2. Shortage of working capital to finance exports
3. Limited information to locate and analyze markets
4. The problem of identifying foreign business opportunities
5. Lack of managerial time to deal with internationalization
6. Inability to contact potential overseas customers
7. The problem of developing new products for foreign markets
8. Unfamiliar foreign business practices
9. Unable to meet export product quality /standards or specification
10. Unfamiliar exporting procedures which involve lots of paperwork
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INTERNATIONAL
INSTITUTIONS
FROM
AN
INTERNATIONAL
BUSINESS
PERSPECTIVE
 These are institutions that are important in international business
 These institutions focus on various types of cooperation some global while others are
regional.
 Some have membership composed of many countries while others have relatively few
memberships of nations.
 More are groupings of governments but few are private.
INSTITUTIONS:
What are they?
 These are socially constructed cultural groups with regulative normative and cultural
cognitive elements that together provide stability and meaning to social life.
 Institutional theory is the name given to these groupings
 These institutions are seen as a collection of norms that regulate the relations of individuals
to each other.
 These institutions are socially constructed.
 A group, society, or culture constructs them and they limit one’s behavior
 Those behind the development of the new institutional theory includes
i.
W. Richard Scott
ii.
Douglas North
iii.
Paul DiMaggio
iv.
M.W Peng
v.
Walter Powel
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 These institutions according to worth are best understood as organized collections of basic
values and unwritten code of conduct that limit and directs the decisions firms can make
Types of institutions
According to Scott Richard, there are two categories of institutions
i.
Formal institutions
ii.
Informal institutions
1) Informal institutions use customs and ideologies.
 Formal institutions influence behavior through laws and regulations
 An example of informal institutions is European Union’s directorate-general for
competition
 This body influences the international firm’s behavior when it wants to execute a merger
or acquisition, even if the companies involved are not European.
 The firms if they want to operate or sell into the E.U will require approval from this body.
2) Informal institutions use norms and values to mold behavior e.g., it can be found in patterns
surrounding a firm’s supplier relationship.
 Japan calls for supplies to build relationships with potential buyers. Price will not be the
prime determinant of the buy decision in this game- knowledge /principles judge. In USA
price plays an important role
 The cultural Custom in the US is to share drinks after the deal is sealed and continues after
 None of this process is structured or formalized but this happens
 These norms based on cultural values operate to limit behavior choices and reduce
uncertainly for the supplier and buyer in both situations.
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 Informal institutions, therefore, exert a powerful influence on the choices open to the firm’s
international activities
SCOTTS MODEL OF INSTITUTIONS
 He describes 3 types of supportive pillars on which institutions rest.
 These are: a) Regulative
b) Normative
c) Cognitive
 Formal institutions in legal, political, and economic areas rest on a regulative pillar.
 They function to constrain and regulate the firms’ behavior through rules, laws, and
sanctions
 All mechanism that enforces compliance are used compliance to these firms makes sense
 Informal institutions rest on two pillars
a. Cognitive
b. Normative
 The normative pillar influences a firm behavior through collected values and norms
 Professional organizations are informal normative institutions
 When the firm action complies with the requirements of a professional organization the
firm is rewarded with licensing certification and accreditation such as ISO 9001 ranking
for quality management.
 Its conferred (awarded) by the international organization for standardization (ISO).
 The cognitive pillar is difficult to see because it goes to the shared sets of assumptions that
shape our meaning enabling us to have a shared reality.
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 The US and Japan norms on suppliers’ relationship rests on the cognitive pillar.
Institution’s characteristics pillars and attributes
Institutions
Formal
Informal
Pillars
Regulative
Normative
Cognitive
Social obligation
Pre-disposition
Compliance based Expedience
(taken for granted)
on
Institutionalization
Coercion
Norms
Imitation
Means to an end
Appropriateness
Conformance
based on
logic based
orthodoxy
Legitimacy
based Legal
Cultural governance
enforcement
on
Cultural support
conceptual
correctness
Indicators
evidence
/ Rules, laws
sanctions
Certification or
Prevalence
accreditation
Similarity
INSTITUTIONAL THEORY AND INTERNATIONAL BUSINESS
 Institutions function to influence the range of actions that a firm can take
 Formal institutions e.g., the national government are major players in their
geographical areas
 Through their rules and regulations, they constrain the firm.
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 Informal institutions range from professional organizations to non-governmental
organizations that establish standards, principles and represent humanity.
 Informal institutions resting on the cognitive pillar use ideas to define reality by
creating frameworks (structures) and creating guidelines.
 Informal institutions are less tangible as compared to formal because ideas are
invisible.
 The limitation institutes provide the firm leads to reduced uncertainty in the firmsexternal environment.
 This reduced uncertainty works to the advantage of the firm because it provides
fewer complex environments in which the firm makes decisions.
GLOBAL LEVEL INSTITUTIONS
Global institutions include: 1. United Nations
2. Bretton wood institutions
3. IMF and World Bank
4. World trade organization
1. UNITED NATIONS
a. Outline UN as an institution both in the light of new institutional theory and in terms of its
structure
b. Explain its relevance to international Business
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 After 2nd World War representatives of 50 countries met in San Francisco in 1945 to
develop the United Nations charter.
 Today UN is the best-known worldwide organization
 The 192 members today are dedicated to promoting peace and global stability
 Many of its activities relate directly to business
 It is responsible for many international agreements including the body of international law.
 UN declaration of human rights was adopted in 1948 to ensure basic and seek human rights
for all
 UN as a stabilizing force in the world economy contributes to the conditions under which
international business is conducted.
 UN operated on agreements making it an informal institution. Its authority rests on the
normative pillar
Ways in which un plays a significant role in international business
1. It sets technical standards and norms- these norms function as soft infrastructure for the
global economy e.g., the United Nations center for trade facilitation and electronic
Business (UNICEF ACT) has standardized trade documents and developed standards for
electronic data exchange.
2. UN efforts prepare the ground for investment in emerging economies
 It focuses development on health, governance, political stability
 The UNESCO (United Nations Educational Scientific and Cultural Organization)
promotes literacy for adults and children who cannot communicate through reading
and writing.
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3. UN agencies address the downsides of globalization- such as terrorism crime, drugs, and
arms traffic
 Treaties focused on areas of terrorism (taking of hostages) have been developed so
that agreed-upon responses among UN members exists
4. UN is making efforts to reduce global environmental problems through the work of UNEP.
 UNEP laid down the groundwork for the climate change convention which led to the
Kyoto Protocol (to reduce gases/ pollution.)
 UNEP has developed many initiatives that support sustained business practices
5. UN addresses education and health issues that require global level solutions arrived at in
partnership with businesses.
 This is done through global compact i.e., partnering of private industry with groups in
developing nations
6. It promotes social justice and human labor rights. (Done by the UN Economic and social
council)
7. Efforts of the UN build the cornerstone of an independent world, with trust and shared
values e.g., anti-corruption, labor, environment, etc. are some of the principles and
strategies used to create trust.
Un Organization:
The work of the UN is carried out through five main bodies or organizations
1. General Assembly
 All UN members are members of the general assembly- which is the main deliberative body
where, each nation has one vote regardless of its size, wealth, or power
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 General Assembly acts and adopts resolutions expressed by the members
 The General Assembly decisions are normative as they have no legally binding force for the
governments but they carry the heavyweight of world opinion.
2. The UN security council
 It’s a 15-member body
 Its goal is to maintain international peace and security
 It has 5 permanent members

China

France

Russian Federation

United Kingdom

U.S
 It has 10 non-permanent members to ensure every area is represented.
3. The economic and social council (ECOSOC)
 Concerned with economic issues i.e., trade, transport, industrialization economic
development.
 Social issues- population growth, children housing, women rights, racial discrimination,
illegal drugs youth human environment food, etc.
4. International Court of Justice (ICJ)
 World Court
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 It renders legal decisions involving disputes between government and advisory opinion
 Government usually intervenes on behalf of corporations or individuals since only nations
litigate before the court.
 It has 15 judges coming from 15 different countries –serves 9 years term.
 They are appointed by the General Assembly and Security Council.
5. The secretariat
 Headed by the secretary general of U.N
 It’s the UN staff
 Secretary General is appointed by the General Assembly on the recommendation of the
Security Council
 He serves for 5years which is renewable
 Banki-moon of Korea- 8th secretary appointed 2007
 It has 8,600 people from 170 countries
How UN matters to international firms
1. It negotiates global roles to support the international exchange of goods, services, money, and
information.
 Rules that protect freely sailing ships are authorized in UN conferences
2. International civil aviation organizations negotiate the web of agreement that allows
commercial airlines to fly across borders and land in case of emergencies.
3. The WHO sets standards for pharmaceutical quality and standardizes the names of drugs
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4. Protocols of the universal postal union prevent losses and allow the mails to move across
borders.
5. International telecommunication union allots airwave frequencies.
6. ILO prevents labor rights, safe working conditions, and training.
7. World meteorological organization collects and distributes data used in wealth forecasting.
8. UN sales convection and UN convention on carriage of goods by sea contribute to establishing
rights for buyers and sellers’ international transactions.
9. The UN Commission on international trade law and the UN international labor organization
set conditions for international transactions and labor standards.
UN Going Forward
 Current problems require global or regional solutions
 UN is poised to help us face these formidable challenges
 AIDs/HIV, terrorism, ethnicity that leads to genocide, environmental issues, humanitarian
crisis, military conflicts, drug, and human trafficking, etc.
 There is no other body in the world that brings together the world’s citizens to address
global needs
 UN is ready to coordinate communication, education, etc.
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2. INTERNATIONAL MONETARY INSTITUTIONS
Describe the purpose of the two global monetary institutions, the IMF and the World Bank
 In 1944 almost at the end of the 2nd World War representatives of the 44 allied nations met
at Mt. Washington Hotel in Bretton wood, New Hampshire to plan for the Monetary future.
 The gold standard which was the common denominator of currencies had undergone
pressure due to the World War including the great depression of 1929-1933
 Bretton woods resulted in the world’s first negotiated agreement among independent
nations to support trade through monetary institutions
 This meeting set up the IMF and the World Bank.
 IMF was to establish rules for international monetary policies and their enforcement
 World Bank also called IBRD was to lend money for development projects
a) IMF
 IMF assumes that the common interest of all nations is in a workable international
monetary system that transcends conflicting nations’ interests.
 It has 185 members
 Contribute funds called quotas which is determined by the size of the nation in the world
economy
 It forms a pool of money from which the IMF can lend.
 The Quota determines how much a nation can borrow from IMF and how many votes it
has.
American
-
17.08%
UK
-
4.94%
China
-
3.72 %
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Japan
-
6.13%
 The policies and actions of IMF have a profound impact on business and people worldwide.
 This is because it sets the monetary framework for trade
Purpose of IMF
1. To promote international monetary cooperation.
2. To facilitate expansion and balanced growth of international trade.
3. It promotes exchange stability and orderly exchange arrangement among members
4. It establishes multilateral systems of payment
Current issues of IMF
1) Economist Jaffrey Sachs director of earth institute observes that IMF has been able to reinvent
itself as challenges have evolved on the economy. Monetary and financial levels.
 He sees some major areas for IMF to reform to ensure a smooth running of the international
monetary system.
 The rise of Asian economies will make the US-centric approach of IMF absolute. I.e., the
US will no longer be a conductor of the global monetary orchestra.
 IMF should convince upcoming economies to accept multilateral responsibilities that go
beyond their economies.
2) As Asia rises there will be a temptation towards protectionism in the US and Europe
 These countries will exert pressure on China to manipulate its currency to meet their
objective
 IMF should help make certain that China monetary policy is managed both by China for
long term multilateral stability
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3) The financial crisis will become more global and IMF has to become prone to actions. e.g.,
Africa debt cancellation came 20years after the African debt crisis such time lag won’t work
in today’s fast-paced global evolving economy
4) Sachs seas fewer currencies in circulation as global trade continue to increase.
 He says smaller economies will adopt major curries i.e., dollar, Euro
 Regional trading will develop. Developing regional currencies like the Euro Model.
 IMF should be ready to support this process
5) The firth challenge of IMF is the increased number of ecological shocks. E.g. south Asia
Tsunami
 Earthquake- Pakistan/ Indonesia
 Hurricane – USA
 IMF challenge is to create and develop a way for global financial markets to spread these
risks through insurance against such ecological disasters for governments
Successes
1. It has developed and maintained a system of currency exchange that makes global trade
possible
2. It has helped world trading systems avoid financial disasters
3. It has supported governments in monetary managements
Failure
1. It has mismanaged crisis in developing countries
2. Countries e.g. Brazil, Argentina, Turkey, Indonesia contribute 70% of the IMF loans and
have been making early repayments which have surprised IMF
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3. Fewer countries are asking for loans and this means income falls for IMF thus IMF needs
to rethink a new business model.
b) WORLD BANK
 Established along with IMF in Bretton woods meeting
 It’s an institution that focuses on the funding of development projects globally.
 It’s a non-profit co-operative for its 185 members nations
 It can pass on its ability to borrow funds at low rates to developing nations.
 The two institutions at the world bank groups are:  International Bank of Reconstruction and Development (IBRD)
 International development association
 Both loans to countries to support their development
 World Bank loans to middle income and credit working poor nations.
 IDA loan to poorer countries.
 The other 3 institutions that participate in the world Bank are: International Finance Corporation: It’s the private arm of World Bank and invests in
companies and financial institutions in developing countries
Multilateral investment guarantees Agency (MIGA) guarantees private sector
investments in developing countries.
ICSID: International Centre for Settlement of Investment, disputes –helps resolve
disputes between governments and foreign investors and in that way, help build foreign
direct investment
IFC: Support small loans to entrepreneurs. It helps in building domestic capital so that
local entrepreneurs in developing countries will have access to funding. It’s important
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for groups traditionally excluded from formal economy i.e., women, indigenous
groups, people in rural areas, and states emerging from conflicts.
Problems:
It is facing competition from private funders and thus loses customers
c) WORLD TRADE ORGANIZATION
 The only global international organization designed to establish and help implement rules
of trade between nations.
 Started in 1995- to reduce or eliminate trade barriers and restrictions worldwide.
 It was to help producers of goods and services; exporters and importers conduct their
business by reducing cost.
 Its rule-based organizations with decisions negotiated by all members countries
 World Trade Organization agreements limit the possible actions government may take in
their trade relationships
 These rules set by World Trade Organization simplifies the trade environment the firms
 In seeking equitable terms of trade. The World Trade Organization conducts 3 types of
activities.
i.
It negotiates core agreements signed and ratified by all its members
ii.
It establishes trade rules
iii.
It helps settle trade disputes
 Nonmembers of World Trade Organization - Algeria, Iran, Iraq, Lebanon, Syria, Bosnia,
Herzegovina, Afghanistan, Uzbekistan
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Development of World Trade Organization:
GATT- General Agreement on Tariffs and Trade
 After 2nd World War, Western leaders sought to establish an international trade organization
to promote trade liberalization.
 It was an organization that was to operate in a commercial area
 This led to the establishment of GATT –In 1974 it had 23 members.
 The principle of GATT was that member nations would treat all GATT members equally.
 If two members agreed to reduce a tariff this reduction would be extended to all GATT
members.
 GATT negotiations were conducted in 8 extended conferences called the round table.
 First round table – 1947 last 1986 in Uruguay
 These conferences reduced tariffs among member countries.
 It settled disputes among member countries, satisfactorily without publicity.
 The volume of trade in manufactured goods increased.
 Uruguay round table of 1986 was the last conference. It reduced tariffs further. It wrote down
international rules for trade in services and agriculture and the protection of intellectual
properties.
 Uruguay roundtable negotiations established the World Trade Organization.
 January 1995, WTO began to administer international trade agreements.
Principles of WTO:
Five basic principles;
1. Trade without discrimination i.e., nation to treat all WTO countries equally.
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2. Free trade gradually through negotiations – Lower trade barriers, importation to encourage
trade growth.
3. Predictability through binding and transparency.
 Predictability helps businesses know what the real cost will be.
 Binding agreements on tariffs reduction give business people realistic data.
 Transparency: – Involves making trade rules as clear and accessible as possible. Business
people are helped in anticipation of a stable future.
4. Promoting fair competition
 WTO trade relationships support fair competition.
 It protects dubbing of producers at prices below the cost of the manufacture.
5. Encouraging development and economic reforms
 ¾ of WTO are developing economies and those changing to market economies.
 These nations are active in WTO's current Doha Development Agenda.
The Doha Development Agenda and Developing Nations:
i.
WTO held a meeting in 2001 in Doha Qatar.
ii.
Member nations agreed to launch a new agenda and to work on implementing present
agreements.
iii.
WTO membership has recognized that developing nations face constraints that limit their
ability to benefit from WTO trading systems especially on issues around the trade in textile,
clothing, agriculture, and fish.
iv.
WTO has initiated an aid program to provide assistance to these members for infrastructure,
technical support, and productive capacity
v.
These 3 areas affect developing nations' ability to gain from trade agreements.
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vi.
In 2008 the WTO members agreed to this assistance.
vii.
The Doha development agenda has seen discord on many issues concerned with the trading
needs of developing nations.
1. In 2003, in Cancun Mexico, talks collapsed when delegates from developing nations in Africa,
the Caribbean, and Asia left the meeting due to a lack of compromise from developed nations
on agriculture.
2. In 2004 June, the WTO delegates agreed to the proposal from developing nations calling for
the reduction and elimination of agricultural tariffs.
 Brazil sued the USA in WTO in 2008 over cotton subsidies
 USA, EU due to this agreed to reduce agricultural subsidies.
 2006 Director-General Lamy suspended talks to give time for time to meet agreement on
cutting subsidies in agriculture.
WTO challenges:
1. WTO has encountered considerable controversy in the public arena.
 This was due to the insensitivity of developed countries to the needs of the developing
countries.
 Agricultural subsidies in wealthy countries have proven a difficult issue because of the
domestic political impact they can have.
2. World trade remains on the goodwill of its members to implement its decisions.
 For example, a banana war between the European Union and the USA.
 EU did not comply with WTO ruling of opening the market and instead traded- with Latin
America
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 USA – imposed sanctions on EU trade still it did not comply but they came into agreement
later.
3. One of the most difficult negotiations areas facing WTO members is trade-related intellectual
property rights (TRIPS)
 TRIPS refers to the world trade organization copyrights, trademarks, trade secrets, and other
intellectual property matters.
 WTO agreement is that countries grant –patents for 20 years period and copyrights for 50
years.
 Intellectual property rights violations are common in industries such as:
 Music
 Software
 Pharmaceuticals
 It occurs in a small group of developing countries,
 Music and software are rampant in China
 Pharmaceuticals patent violation legendary in India, China, and Brazil
 Indian pharmaceutical companies can produce generic equivalents of drugs that are patent
protected in the west and sell in markets in developing countries at prices consumers can afford.
 Doha Development Agendas has agreed that intellectual property rights should not take
precedence over public health.
 WTO has established a system of compulsory licensing that mandates that copyright holders
license producers in developing countries.
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REGIONAL LEVEL INSTITUTIONS
 They affect the choice the firm makes in international business.
A. COOPERATIVE MILITARY AND SECURITY AGREEMENTS
 Military organizations are connected in trade in that they stabilize international conditions and
cross-border economic environments, just by their existence.
 Two current major military agreements are;
1. North Atlantic Treaty Organization (NATO)
2. Collective Security Treaty Organization
1. NORTH ATLANTIC TREATY ORGANIZATION (NATO)
 Security alliance of 26 North America and European nations governed by North Atlantic
treaty of 1949.
 The agreement is that an armed attack against one or more of them shall be considered an
attack for them all.
 NATO was established after World War 2 in response to a perceived growing threat from
the Soviet Union
 NATO came together after September 11, 2001, terrorist attack in the US.
 Today former Russian bloc countries are members of NATO
2. COLLECTIVE SECURITY TREATY ORGANIZATION
It consists of 10 former soviet countries and six members from central Asia. Its purpose is for
peacekeeping internally and externally
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B. REGIONAL AND SECTOR ECONOMIC INSTITUTIONS
 These are institutions that result from economic agreements among countries on a regional
basis
 They include:

Organization for economic co-operation and development

Organization of petroleum exporting countries

G8 – a group of 8

Regional trade agreements among nations
Organization for economic co-operation and development
 It’s a group of developed countries dedicated to promoting economic expansion in its members
 It’s referred to as the “rich man’s club because today it is composed of 30 of the wealthiest
nations of the world.
 It supports the government in its effort to increase economic growth, fight poverty, maintain
financial stability, etc.
 OECD provides information on international business to its members.
 It has encouraged its members to eliminate bribery and establish a code of conduct for
multinational companies.
 The business and industry advisory committee of OECD was created in 1962 to represent a
business industry
 It works in various areas that concern business, trade liberalization, sustained development Ecommence, taxation, etc.
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Organization of Petroleum Exporting Countries (OPEC)
 It’s an organization of oil-exporting countries
 It was formed so that they could bargain more effectively.
 It was born in 1959 at an Arab petroleum congress in Cairo.
 They were to consult on price changes of oil.
 The members of OPEC are all developing economies
 OPEC economic strength became evident in 1973 when it placed an embargo on oil against
Netherland, the US, leading to a large price increase for all customers
 It controls 68% of the world-known petroleum reserves
 It supplies 84% of European on needs and 90% of Japan
 Using its strength OPEC increased oil prices in 1980.
 This caused recession and unemployment in oil-importing countries.
 It sparked counseling measures and increased oil exploration in non-OPEC members and
search for the alternative energy source.
 This weakened the OPEC market up to today, although they refused to meet oil prices
 Oil prices have increased $60 a barrel in 2005 £126 per barrel
Response to this market fluctuation is difficult because it takes 2years to start up
production then refinement takes another time.
Weakening US dollar flat production trends, the bottleneck at the refining stage, and
lead time as increasing oil prices.
Political instability in the Middle East war in Iraq, Iran nuclear crisis, hurricane
disruption to the refinery are factors leading to the shooting of oil prices
Stability in Venezuela West Africa and increased demand for the product.
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Terrorism being exported com some of the oil-producing nations add to the general
instability.
THE GROUP 8
 It’s a group of leaders from the industrialized nation that meets regularly to discuss issues
of concern
 They are among the industrialist nations who were affected by the oil crisis of 1973
 Financial officials of the UN, Europe, Japan, and France meet to discuss global financial
issues
 At first, they were 6 states than Canada and later Russia making G8.
 It’s an informal organization without staff or a budget.
 They discuss issues on health, environmental safety, development law enforcement.
 The G8 trade among themselves
 G8 is seen to be responsible for the negative outcomes of globalization
The Economic Integration Agreements
 After World War 2 economic cooperations have increased among nations
 It starts with an agreement to have a free trade
 This develops into a custom Union leading to a common market.
 This agreement may eventually lead to an agreement for complete economic integration.
 These blocs are important for international firms due to cost reduction inside the blocks
because of the trade barrier
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Levels of economic integration:
 The free trade area is an area in which tariffs among members have been eliminated but
members keep their external tariffs.
 In free areas tariffs are abolished but each member maintains its external tariffs to other
countries.
 Within the free trade area restrictions generally remain on the movement of services
(accounting, insurance, and legal services) labor, and capital.
 Examples are, North America free trade, European free trade Association
 A custom Union- it’s a collaboration that adds common external tariffs to the free trade
area i.e., it’s a logical extension of the free trade area.
 There are no tariffs among countries in the customs union and the tariffs charged by
members nations to other countries are uniform among the members e.g., South African
Customs Union between the US, Lesotho, Namibia Swaziland, and Botswana.
 A common market is a customs union that has no restrictions on the mobility of services
people, capital among the member nations. E.g., the European Union which is developing
towards complete economic integration.
 This integration involves a high degree of political integration as well e.g., the European
Union has a central bureaucracy that is responsible for coordinating and harmonizing tax
rate, labor system, education system legal systems, etc.
 European central bank develops monetary policy
 A single currency – the Euro has been established to replace member nations.
 Complete economic integration refers to integration on both economic and political levels.
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AFRICAN TRADE AGREEMENTS:
 African countries have formed regional trade groups to promote economic growth.
 Many of them are in the negotiation stage
 Except for S.A, African economies are small and underdeveloped.
 Governments face challenges in infrastructure, public health, HIV T.B, malaria, corruption,
insurgencies, and civil war.
 The unstable environment is not conducive for economic growth but the collaboration
perseveres.
 These include: i.
Economic Community of West Africa (ECOWAS)
ii.
The common Market for Eastern and Southern Africa (COMESA)
iii.
THE South African Development Community (SADC)
 A new group has recently been formed that would provide solid benefits to its members.
The African Union (AU) replaced the organization of the African Union in 1999.
 AU has 53 members.
EUROPEAN UNION:
 It’s an institution of 27 countries that are committed to economic and political cooperation
 It began as a customs union then developed to a common market and now has achieved
economic integration.
 The beginning of E.U can be credited to French foreign minister Robert Schuman who in
1950 proposed the first step of united Europe
 This was on the integration of coal and steel industries of six countries.
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 1957 treaty of Rome established a common market among the six members
 1967 it had established the EU with a parliament, commission, and council of ministers
 1993 Maastricht treaty establish foreign policy, economy, and domestic affairs as areas of
integration
 Since then, it has grown.
 Its principles are Liberty democracy, human rights and freedoms, and rule of law.
 Many nations are still applying to join them Turkey, Croatia Yugoslavia
 On is it Muslim country will be compatible culturally with E.U

European unions have become a regional government because some members have ceded
their sovereignty to join.
Why is it different from regional institutions?
 European union implements legislation directly to each member state
 It has moved towards a common foreign policy, security policy approach to justice and
monetary union
 A common agricultural policy has been developed to support food production
 Custom and passport checks have been abolished
 The Euro is used in 15member countries and 9 others
 It’s a rival to the dollar
Institutions of EU
 They are 9 institutions
They include
1.
The European parliament – it’s a legislative body whose members are elected from
member nations (785 members) meets to pass European law –Strasbourg- France.
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2.
Council of European community- it’s a policy setting institution deals with common
foreign policy security policy, financial policy, etc.
3.
European Commission- it was the European Union Day to day operations
4.
European court of justice- its rule issues related to policies
5.
Court of auditors- reviews EU Funds
6.
European economic and social committee – consultative body in areas of occupation
and social interest.
7.
Committee of regions –gives views on education transporting, health
8.
European central bank- manages the Euro to ensure price stability.
9.
European investment bank – supports lending programs
Achievements
1.
Succeeded in labeling laws, testing procedures, and consumer protection measures
covering everything from toys to stockbrokers.
2.
Have scrapped 60million customs and tax formalities at their shared borders.
3.
The European monetary union- has developed the Euro both in coins and notes which was
in use by January 2002.
4.
This currency reduces the cost of doing business across the European Union.
5.
There are no currency exchange costs and no risk of currency exchange fluctuation.
European Union Impact
 It’s the largest trading economy.
 European rules have an impact on the U.S.A, Japan, China, and others because of its size
and importance as a trading partner.
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 In an environment, E U requires recycling of 70% of all equipment including cell phones,
computers, households appliances IT, and telecommunication equipment.
 Today the European Union has built the economic force necessary to make many of the
rules that can influence world trade. E.g., in 2001 European Commission voted against the
proposed mergers of two US companies that had been given go-ahead by the US Justice
Department.
 It could have reduced competition in the Aerospace industry and increases prices for
customers
 Microsoft was fined in 2004 for breaking European market rules.
 The US and Europe have enjoyed the well established commercial relationship, if Europe
prospers then it’s an advantage for the U.S
 These two economies greatly influence the world patterns
POLITICAL ENVIRONMENT AND INTERNATIONAL BUSINESS
Political Forces
Kosovo – Newborn –capital pristine – it should dissociate with violence that has rocked them
Israel after 60yrs it’s trying to attract more visitors by rebranding itself as a lifestyle-oriented
destination.
 It has a senior’s public relation- it’s the lowest in the world.
 It has a country website on my space and Facebook
 These efforts are intended to shift the perception of Israel from the lenses of militarization
and regional to the human lens.
 The political climate of a county in which a business operates is important.
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 A hospitable and stable government can encourage business investment and growth,
despite geographic or weather obstacles and scarcity of natural resources.
 Countries well blessed with natural resources topography and good weather have very little
development because of government instability.
 A government may be hostile to foreign companies which can provide capital, technology,
and even development training.
 Many of the political forces with which businesses must cope have ideological sources.
 Other source includes nationalism terrorism, traditional international organization, and
government-owned business.
 All these are risks political forces can pose to private business.
Ideological forces
These are
i.
Communism
ii.
Capitalism
These are used to describe political
parties, government and people’s idea
They indicate ideological beliefs.
iii.
Socialism
iv.
Conservative or liberal
i.
Communism
It is communist doctrine that the government shall own all the major factors of production
 All production in communist countries is done by State-Owned factories and farms.
 Labor unions are government-controlled.
 Communism according to Karl Marx was a theory of social change directed towards the
idea of a classless society
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 Communism according to Lenin involves
 Seizure of power by a conspiratorial political party
 Maintenance of power by stern suppression of internal opposition
 Commitment to the ultimate goals of a worldwide communist state
 Communist government declares ownership of all productive factors (expropriation- i.e.,
government seizure of all the property) within its borders, owned by foreigners.
 The rules of international law recognize a country’s right to seize the property of foreigners
within its jurisdiction and the same rules require the country to compensate owners of these
properties.
 Communism failed as an economic system because
USSR concentrated its best scientists, engineers, managers, and raw materials in
production for the military and neglected production of consumer goods.
ii.
Capitalism
 Capitalism idea is that all the factors of production should be privately owned.
 Under perfect capitalism, the government is restricted to functions which private sector
cannot perform, i.e., national defense, police, fire, public service, and government
international relations.
 All businesses are subject to government laws and regulations in their activities.
 Government approval is required to practice such professions as law and medicine.
 Tailored laws govern the insurance banking and transportation
 The local government requires business licenses and imposed use restrictions on buildings
and areas.
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 A non-compliant business may incur fines or imprisonment for its managers.
iii.
Socialism
Socialism advocates government ownership or control of the basic means of production,
distributions, and exchange
 Profit is not an aim
 The so-called socialist governments have not followed the socialism doctrine e.g.,
Singapore professes to be a socialist state but in reality, is aggressively capitalistic.
 In developing countries, some degree of socialism is professed.
 The government owns and controls many of the factors of production
 Shortage of capital, technology, and skilled management and labor are common in
developing countries and always seeks help from developed countries or international
organization.
 Seeking help comes when the country perceives advantage from the help such as more jobs
to its people
 New technology and
 Export opportunities
iv.
Conservative and liberal
 In the US- the world conservative connotes a person or group or party that wishes to
minimize government activity and maximize the activities of private business and
individuals
 Conservatives differ in different areas
 In Europe, there are right-wing conservatives and leftists.
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 The right wings are extreme
 In China, conservatives are people who long for the good old days when the governmentowned and ran everything before it shunned communism.
 Liberal- Connotes a person group or partly that urges greater government participation in
the economy and regulation in the ownership of the business.
 Left-wing and liberal are almost the same through left-wing is closer to socialism
 These ideologies cannot be over-emphasized because they change over time as they
perceive shifts in the mood of votes.
 Business people must do their best to influence those political forces then react to them.
 People behind these political parties are influential and powerful in the corridors of power
in their countries.
 They influence litigate precedent by setting lawsuits that affect judicial decisions for the
year to come
 These decisions and laws that result from such organization lobbying powerfully affect
business at every level.
Government ownership of a business
All governments whether communist-socialist, capitalist, etc. to some extend own factors of
production of their countries.
Why do governments put their hands on firms? Or why are firms nationalized
1. To extract more money from the firms i.e., the government suspect that the firm is
concealing profits
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2. Profitability- The government believes it could run the firms more efficiently and make
more money.
3. Ideology- government sometimes nationalize industries like in Britain, France/ Canada
(European socialist)
4. Job preservation – to save jobs by putting dying industries on life support systems.
5. Because the government has pumped money into the firm thus controls it.
6. One of the advantages of state-owned companies is that they can get direct funding from
the government.
7. Where government-owned companies have been competing with private companies there
have always been companies of the government companies having unfair advantages
This is because: i.
Government-owned co can cut prices unfairly since they do not make a profit
ii.
They get cheaper financing
iii.
They get government contracts
iv.
Get export assistance
v.
Can hold down wages with government assistance
Therefore, the objectives of both firms cannot collaborate (usually differ)
Privatization:
 It’s the transfer of public sector assets to the private sector
 It’s the transfer of management of state activities through leases and contracting out
activities previously conducted by the state.
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 Britain’s former prime minister Margaret Thatcher was a leader of the privatization
movement
 She sold 30 state-owned companies and made $ 65 billion
 Chile -1975-1989 –Pinochet sold 160 corporations and 16 banks owned by the government.
 Several countries are privatizing their airport, garbage, and postal services
 German –Deutsche post-privatization is a success story
 Japan postal system – privatized in 2007 and since then can save a lot of money
 1997 Mozambique brought crown agents a British company to run its customer service.
 Due to poor pay, there was a lot of corruption, bribery, etc.
 Crown Agents set up anti-smuggling teams and successes have been seen.
 Smuggling of cigarettes, alcohol meat, and electrical goods condensed milk, and yogurt
stopped.
 Nigeria is also going private. Privatized companies have improved their profitability which
has led to a notable improvement in bank loans portfolios. Privatization also includes
contracting out of activities conducted by the state, e.g., Thailand and private companies
operating passenger trains of its state-owned railroads.
 Even unemployment services are being privatized e.g., Australia has found the church
groups to be the most successful employment agency operations. They have sacred
lucrative government contracts and community based charitable agencies for helping the
long-term unemployment
 The water industry in some countries has also been privatized giving better services as
compared to when it was state-owned.
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Government Protection
 A historical function of government has been the protection of the economic activities i.e.,
farming, mining, manufacturing within its geographical control
 These activities must be protected from attacks and destruction from robbery by bandits,
revolutionaries, foreign invaders, or terrorists.
 1990- Iraq forced invades Kuwait overwhelming its defenders.
 UN-sanctioned international coalition mobilized and transported armed forces to the
middle east.
 It was a short war called the desert storm that forced Iraq forces out of Kuwait. They
burned 100’s of Kuwait oil wells.
 The aftermath of this Desert Storm demonstrated the influence of politics on business.
 E.g., in gratitude for American leadership in the war other Gulf countries- Saudi Arabia,
Qatar, Bahrain, and United Emirates bought American arms worth 36 billion.
 Selling to Kuwait- given to China instead of America-since China threatened to pull out of
the UN security council.
 They felt the USA was blackmailing Kuwait
Terrorism
These are unlawful acts of violence committed for a wide variety of reasons
i.
For ransom
ii.
To overthrow a government
iii.
To gain the release of imprisoned colleagues
iv.
To exact revenge for real or imagined wrongs
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v.
To punish unbelievers of the terrorist religion
 Since 1970 the world has been plagued by terrorism.
 Groups have hijacked planes, shot and kidnapped individuals, bombed people and objects
 1970-1980- Italy was hard hit by terrorist violence against businesses and politicians
 By 1982- Italy was almost unable to govern itself but the government struck back
successfully- by creating an anti-terrorist squad.
 The terrorists joined hands with the mafia which was feared.
 The mafias were threatening to contaminate Italy’s financial system.
 Sept 11, 2001, terror attack on America massively and lethally.
 4 planes hijacked –from Boston Airport Washington New Jersey.
 Through world track center
 One pentagon Pennsylvania –overwhelmed by passengers
 Due to this American congress allowed the Homeland security department to combine
activities of many agencies to protect against terrorist
 Alkaid, Irish republican army Hamas, Islamic fundamentalist groups, Japanese red army,
Germany Red army- Latin America, Al Shabab
 Government-sponsored terrorism – is taken as an act of war e.g. Palestinian convicted in
Britain 1986 revealed the explosives had been brought to London by Syrian diplomat using
Syrian government airline
 The ambassador had directed the operation
 Cuba, Iran, Sudan, and Syria –sponsor terrorist
 Kidnapping for ransom is a weapon used by terrorists – and victims pay a lot of money
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 Kidnappers know holding many people ransom keeps the money rolling. E.g., Philippineskidnap of west Gadaffi – paid 1m dollars for each
 This is usually a loss for businesses if their goods or people are hijacked
 What steps should traveling international business executives take to protect themselves from
terrorists?
Countermeasures by firms
Insurance to cover ransom payments (kidnap ransom and extortion)
Anti-terrorist schools and companies to handle negotiations with kidnappers have been established
These schools offer the course for executives with subjects ranging from:
i.
Defense drilling techniques
ii.
Escape tactics
iii.
Crisis management
iv.
Country by country risk analyses are available in computer hookups
v.
How to frustrate would-be kidnappers
vi.
Hardening automobile- armor vehicle protection
vii.
Blast protection
viii.
armor-piercing
Colombia 19 2002 May- the attack on jeep – activated centigon deadbolt locks before they openedsped began shouting –left unarmed.
Firms need to know about the recent global terrorism index indicating which countries are prone
to attacks
Evaluate the importance of government stability and policy continuing to business
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Government stability
 Government stability can be approached in two ways
1. Government simple ability to maintain itself in power
2. Stability or permanence of government policies
 Business prospers most where there is a stable government with permanent or gradually
changing policies
 Instability can be caused by revolution invasion from abroad or racial conflict
 Instability refers to a state where a government cannot maintain itself in power and makes
sudden unpredictable policy changes
 Stability/instability examples and results
 Lebanon- from stability to instability
 It has prosperous businesses and finances- banking business services, transportation, tourism
center of the middle east.
 Civil war broke out in Lebanon leading to the destruction of offices, banks stores, transport
communication, hospitals, etc.
 People fled the country or fought and survived
 Tourism and all commercial activities ended
 Zimbabwe- was a rich country- a net exporter of food.
 When Mugabe was elected (resistance leader) he seized in 1990 much land and equipment of
big firms to redistribute to smallholders.
 People got land but have failed to produce food.
 These food shortage and country depends on foreign aid.
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 Stealing of 2008 election, corruption has led to instability – thus foreign aid is no longer
flowing –thus starvation/poverty
 Businesses are lost
Traditional hostilities

Traditional hostilities have a powerful impact on business and trade
 Traditional hostilities are long-standing enmities between tribes, races, religions, or countries
e.g., HUTU /Tutsi in Rwanda and Burundi had been enemies for long
 Expenses of fighting are met by mining and selling diamonds
 Today these fighting in central Africa which is rich in Diamond and the tribe that controls the
mines gets profit which is used to buy arms.
 This has spread to West Africa thus spoiling the reputation of the diamond industry
 The companies that buy the Diamond have refused to buy what they call blood diamonds- that
is being used to finance fighting
 Tamils and Sinhalese in Sri-lank
 Tamils in India – gave support to Tamils of Sri Lanka who want to separate states.
 Gandhi- Rajiv –send troops to quell then but failed- later given flower which had a bomb- he
died (campaigning in India Tamil state)
 The conflict has continued and has affected business adversely
 People are afraid of entering combat areas or even doing short-term sales
 No long-term investments due to fear of risking
 These people are denied technology that would come to them due to the conflict which
businesspeople fear (lighter businesses)
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COUNTRY RISK ASSESSMENT
 It’s an evaluation conducted by a bank or business having an asset. In a foreign country or
considering an investment or a loan there.
 Its asset the country’s economic situation and policies and its politics to determine how much
risk exists of losing the asset or not being paid
 The political events of recent years have caused firms to concentrate more on country risk
assessment
Types of country risks
1. They are political in nature. Among them are: i.
Wars
ii.
Revolutions
iii.
Coups
iv.
Government changes caused by-elections
 Which may be hostile to private business
2. The risk may also be economic or financial
 Countries may have a persistent balance of payment deficits or high inflation rates
 Repayment of loans may be questionable
 Labor conditions may cause investors to pause
 Productivity may be low or labor unions may be militant
3. Laws may be changed concerning taxes, currency convertibility quotas, and labor permitted
 Chances of a fair trial in local courts must be assessed
4. Terrorism may be present –if it is, can the company protect its personnel and properly?
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Information content for CRA
 The type of information firm needs to judge country risk vary according to the nature of its
business
 It also depends on the length of time required for the investment loan or other involvement
to get returns.
 Relationship of the home country where the company originates and the host country
(attitude)
 Consulting and publishing firms are a source of country’s risk analysis
 The company departments
 Hiring expert staff on international business
 Risk Assessment of economist intelligent unit- Iraq- risk Sudan
Argentina –N. Africa
Hong Kong /Singapore- Safe
Brazil, E. Central, and S. Africa, West Africa
TRADE RESTRICTIONS
(Discuss the arguments for imposing trade restriction)
 Trade restrictions on various items have been imposed almost in all countries
 These are restrictions on Rice trade
 Protection of infant industries
 Genetically modified food restriction in Europe

Beef restrictions –mad cow
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 WTO is experiencing difficulties getting the Dotta issues completed due to political
barriers
 Officials who make decisions about trade restrictions are particularly sensitive to the
interest groups that will be hurt by international competition.
Arguments for trade restrictions
1. National Defense
certain industries need protection from impact because they are vital to the security and
must be kept operating although they are not competitive with foreign supplies.
If these firms are driven out of business by foreign firms in cases of war, then these impacts
will not be available
Issues of army –military shoes – in US Domestic shoe co may not provide enough shoes
in case of anything
It can lead to improving footwear
No time to investigate wartime crisis Bata shoe co
The government needs to subsidize a number of firms to maintain sufficient supply in case
of war
2. Sanctions to punish offending nations
This means inflicting economic damage on other nations to punish them or encourage them
to modify their behavior
A common approach is to pass legislation that prohibits trade with the offending nation.
This also brings benefits to other countries e.g., oil sanctions on Iraq gave Libya and Iran
economic gains.
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Restrictions still o Iraq gave France and Russia to do business with Iraq that was occupied
by America
3. Protect infant (dying) Industries
These are firms that require protection from imports until the required investment. Capital
is obtained, the labor force is trained and production techniques are mastered.
When these are met import protection will not be necessary
Without import protection, the firm will not survive because lower-cost imports from
foreign firms will underprice in its local market
This is mostly in developing countries
Dying industries need protection imports that endanger the survival of domestic companies
and the jobs they provide
4. Protect domestic jobs from cheap foreign labor
Foreign exporters can flood the home country’s market will low priced goods thus
eliminating jobs of home-country workers
5. Scientific Tariffs or fair competition
The supporters of this argument believe in fair competition
They want an import duty that will bring the cost of imported goods up to the cost of the
domestically produced articles.
This will eliminate any unfair advantage that the foreign competitor might have.
Their wish is not to ban exports but only want to equalize the process of fair competition.
6. Retaliation
Representatives of an industry whose exports have had import restrictions placed on them
by another country may ask their government to retaliate with similar restrictions.
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American beef- hormone-treated beef
Dumping (Retaliation also occurs in Dump). WTO defines dumping as selling a product
abroad for less than the:
i.
Cost of production in the exporting nation
ii.
The market price in the exporting nation
iii.
The price to third countries
 A manufacturer may dump products to sell excess production without disrupting prices
in its domestic market as a response to seasoned factors.
 It could be either at the end of a fashion season or as a way to raise market share.
 A manufacturer may also lower his export price to force importing nations domestic
produce out of business
 They raise the prices once the objective is accomplished
 Most governments retaliate when dumping is perceived to be harming the local industry
 However, WTO does not permit dumping by any trading partners
Subsidies
 Another cause of retaliation may be subsidies that government makes to a domestic
firm either to encourage exports or to protect it from imports
 Competitors in importing nations frequently ask their governments to impose counter
availing duties to offset the effect of a subsidy.
 Countervailing duties are additional import taxes levied on imports that have benefited
from export subsidies.
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TARIFF BARRIERS
Explain the two basic kinds of imports restrictions
Tariff- or import duties are taxes levied on imported goods for the purpose of raising their price
to reduce competition for local products
 It also stimulates local production
 It’s used to raise revenue on both imports and exports
 Imposition to tariffs can result in retaliation that is harmful to a country economy
Advalorem duty
It’s an import duty relied as a percentage of the invoice value on imported goods
e.g., if flavoring extracts and fruit flavors are subject to 6% ad valorem duty then
When a ship arrives carrying the extracts invoiced at £ 10,000 the importer is required to pay £600
to customs before taking possession of the goods
1. A specific duty- It’s a fixed sum levied on a physical unit of an imported good – per kg or
pound etc.
2. Compound duty- It’s a combination of the specific and ad valorem duty
3. Variable levy- It’s an import duty set at the difference between world market prices and local
government-supported prices
It guaranteed that the market price of the import will be the same as that of domestically
produced goods
NON- TARIFF BARRIERS
 These are forms of discrimination against imports.
 As nations reduce import duties non-tariff barriers have also been increasing rapidly.
 These additional costs they impose on exporters help to discourage trade
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 Non-tariff barriers are two types
i.
i.
Quantitative
ii.
Non-quantitative
Quantitative
 One type of quantitative barrier is quotas
 Quotas are numerical limits placed on specific classes or kinds of goods that a country
will permit to be imported
 Once the specified amount has been imported (absolute) the importation of the same is
prohibited for the rest of the period
 Quotas are global that is total amount is fixed without regard to the source
 They may also be allocated that is the government of the importing nation assigns
quantities to specific countries. Allocated quotas are sometimes called discriminatory
quotas. E.U Banana import given to smaller countries and denied America
 Some producers have used trans-shipment to evade allocated quotas that is where the
finished goods are first shipped to the country with an unfilled quota then the goods are
labeled as products of that country. It then shipped to the quota country.
 Some goods are subject to tariffs- rate quotas- which allows some amount to enter dutyfree or at a low rate.
 When the amount is reached a much higher duty is the charge for subsequent
importation
 Voluntary export restraints- are negotiated export quotas by exporting nations
ii.
Non- Quantitative
They are the most significant
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They can be classified under 3 major headings
a. Direct government participation in trade
b. Custom and other administrative procedure
c. Standards
Direct government participation in trade
 The most common direct participation of government is the subsidy which is
targeted towards the protection of smaller farms and traditional rural economy.
 Government procurement policies are also traded barriers because they favor
domestic products and restrict purchases of imported goods
 Policies may also require that products purchased by government agencies have a
minimum local content
Custom and other administrative procedures
 These barriers cover a large variety of government policies and procedures that
discriminate against imports or favor exports
 In China products being imported are subject to different rates of duty depending on
the entry port because of this.
 Flexibility custom charges are negotiated to lead to corruption
 Governments are also discriminative against (importation) of services e.g., national
airlines require preferential treatment as compared to others- counter location, landing
slots
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standard
 standards are necessary to protect the health and safety of a nation’s citizens.
 But exporting firms have been plagued by many standards that are complex and
discriminatory
 E.g., Canada regulation treats products such as calcium-enriched juice as a drug and
subjects it to special production/market requirements.
 Kellogg co must make 4 different versions of cornflakes at its European plants
because different nations have different standards regarding the vitamins that can be
added to cereal.
 These examples give an idea of the complexity involved in trying to eliminate nontariff barriers
 Exporting countries need to be informed about the changing starts of tariffs and not
tariff barriers in countries where they are doing business or would like to do business.
INTELLECTUAL PROPERTY RIGHTS AND OTHER LEGAL FORCES
 Participants in international business should understand the depth of laws worldwide.
 Laws enacted by governments at all levels on every subject affect international business
 The business has to be aware of laws to comply while businesses expect that laws will
assist them when necessary
 Businesses are concerned with whether the host country is stable and will be able to
protect its business with an adequate legal system
 The legal system should be able to protect the basic rights of employees
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 A stable government and an adequate court system are a welcome environment for
foreign businesses.
International legal forces
 It’s important that a country is based on rule of law instead of rule by political
dictatorship or by powerful elite
 Investors are encouraged if the country's legal system is based on rule of law because
they know their interests will be protected.
 E.g., in Shanghai, it is impossible to win a case against a Chinese who adapted
traditional British law practices.
 Hongkong has an advantage over Shanghai as a location of local firms,
What is an international law
 Once laws cross international borders, the enforcement becomes complicated due to
agreements between nations.
 International law can be divided into:
i.
Public international law
ii.
Private international law
 Public international law includes legal relations between governments
 It includes laws on diplomatic relations between nations and rights and obligations
of several nations
 Private international laws are laws governing transactions of individuals and
companies that cross international borders.
 It would cover matters of business between two different countries
Sources of international law
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 Bilateral and multilateral treaties between nations
 Treaties are agreements between countries and are also called convections,
covenants, compacts, or protection
 International organizations e.g., the UN provide a forum for the creation of many
treaties
 The international court of justice creates international law when it decided disputes
brought before it.
 Customary international law- which consists of international rules derived from
customs usage
 E.g., customary international law is the prohibition against genocide
 Some countries e.g., USA and EU try to enforce the laws outside then borders this is
called extraterritorial application
 This enforcement of laws is done through traditional legal means e.g., the USA
imposes taxes on US citizens and US permanent residents without minding the source
so income or the residence of taxpayers
 U.S companies operating in other countries must comply with law or citizen etc.
INTERNATIONAL DISPUTE SETTLEMENT LITIGATION
 Litigation is the process of making or defending a claim in a court of law.
 Its complicated and expenses since it involves discovery i.e., finding facts relevant to
litigation
 It includes obtaining documents possessed by the other side
 Court allows discovery even in great latitudes i.e., outside one’s country
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 One of the problems involved in cross border litigation is a question of which
jurisdiction’s law should apply and in which location the litigation should occur
 A clause should be included for a choice of law that specifies which law should
govern in the events of a dispute between countries.
 This is because countries have their elaborate laws and the same case may be resolved
in both countries bring confusion
 E.g., a Kenyan seller and an Austrian buyer –both may agree on Kenyan law would
govern any dispute
 A choice of forum clause is a paragraph in a contract that specifies where the dispute
will be settled e.g., NRB
BUSINESS CONTRACTS
 Law of a country given business contracts in that country
 When a foreign business enters into an agreement with another business, there’s a
possibility of that business not performing its obligation
 There is no worldwide court that has the power the enforce its decrees
 The UN court of Justice exists but relies on voluntary compliances of the parties
 Each nation in the world is a sovereign nation and it has its own rules for recognizing
decrees from other nations
 Therefore, if two countries contract enforces a contract the crosses international lines.
Solutions to international disputes
 The United Nations convention the international sale of goods CISG has been
authorized to solve international business disputes
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 It established uniform legal rules to govern international sale contracts and the rights
of buyers/sellers
 All countries under the UN are governed by this body
Private solution- arbitration
This is where international business people agree to solve their disputes through arbitration instead
of going to court
 A neutral person is involved in this case
 Arbitration is quicker fewer expenses and is more private than litigation,
 E.g., international arbitration is
International court of arbitration of international chamber of commerce in Paris
World Intellectual Property Organization and Mediation Center which handles
technological, entertainment, and intellectual properly dispute
International center for the settlement of investments disputes which specializes in
investments disputes
 People and businesses prefer arbitration because: i.
They may be suspicious of foreign courts
ii.
Arbitration is faster than law courts where cases are backlogged
iii.
Arbitration is more informal than court procedures
iv.
The arbitration may be confidentially avoiding unwelcome publicity a
complying with an open court case.
v.
Less extensive
 Despite the legal uncertainties international business still thrives
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 Business people should be aware of the legal environment in which they find
themselves.
 It’s important to understand the various legal system because they vary from one
country to another.
Intellectual property
 These are the items that result from exercising someone’s intellect
 There is a need to protect one’s intellectual property
 This is called intellectual property right. It includes: 1. A patent – which is a government grant giving the inventor of a product exclusive right to
manufacture and sell the invention
2. Trade Mark and trade names are designs and names officially registered by which
manufacturers design and differentiate their products.
3. Copyrights are the legal rights of authors, composers, creators of software artists, and
publishers to publish and dispose of their work.
4. Trade secrets are any information that a business wishes to hold confidential.
Patent
-
The incentives that companies have to spend huge amounts required to develop new
technology are periods of patent protection, long enough to recoup them
 The problem that patents have is the growth of patent trolls, who are like highway robbers
 These are lawyers or investors who buy patents that were mistaken granted to failed
companies
 There are also patent pirates etc.
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Trademark
-
Protection varies from one country to another
 Duration also differs from 10-20yrs
 Trade names are protected in all countries that adhere to international convection for the
protection of industrial property
 Goods bearing illegal trademarks or false statements about their origin are seized upon
importation to these countries.
Copyrights
-
Done for protection against pirating of computer software
Common law or civil law
 Historically there has been a clear distinction between common law which developed in
England and spread to the colonies and civil law which originated on the continent of
Europe
 Courts made laws as they decided individual cases
 Kings’ princes or legislators issuing decrees of passing bills made civil law
 In common law, judges have powers to interpret the law.
 In civil law, judges have the power only to apply the law.
Standardizing laws around the word
 Attempts have been made to standardize laws among various countries
 To international business, the importance of standardization is that business flow much
better when there is a uniform set of rules
 However, standardization is progressing slowly
 Two standardizing organizations are International Organization for Standardization (ISO)
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 It recommends standards in other technology and other fields
 International Electro-Technical Commission (IEL) promotes standardization in
measurements material and equipment in electrotechnology.
 Firms and governments demand products that meet ISO/IEL specification
Some specific legal forces
Taxation
 The primary purpose of taxes is not necessarily to raise revenue for the government
 There are some non-revenue tax purposes these are
i.
To redistribute income from one group to another in-country
ii.
To discourage consumption of some products e.g., alcohol and tobacco
iii.
To encourage consumption of domestic rather than import goods
iv.
To discourage investments abroad
v.
To achieve equality of taxes paid by taxpayers earning comparable amounts
vi.
To grant reciprocity to resident foreigners
 Powerful groups in every country push for those policies that favor their interest and this
accounts for the complexly of tax practices that affect multinationals
 Tax levels
 Tax levels range from high to zero, where the income of defined types incurs not a liability
 Some governments impose capital gain tax others don’t
 They are taxed at different levels
 From country to country complexly tax system differs and there is tax law and regulations
which explains and regulations explains the taxes
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Who obeys the law?
 Compliance with tax law and their enforcement vary widely
 Businesses may find themselves paying separate taxes depending on the country (i.e.,
Kenyan –taxes, and the USA –pay taxes to both)
 This double taxation sometimes calls for tax relief to encourage foreign investment
 Tax treaties
 Due to differences in taxes between nations, many have signed tax treaties or tax
conventions with each other
 Tax treaties define income, source residency, and what constitutes taxable activities in each
county
 They address how much each country can tax the income earned by a national living in
each other’s country
 The presence or absence of a tax treaty is a factor in international business and investment
location decisions
 Tax treaties make the business operate much more predictable because they facilitate the
international flow of goods
 Tax treaties are a key sign of stability for foreign investors.
The disappearing taxpayer

Electronic commerce alongside the growing ease with which firms and people can shift
their operation from one country to another.
 Makes it easier for people to leave countries where taxes are high to avoid taxes altogether,
by doing business on the internet where it’s difficult to trace transactions
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 E.g., entrepreneurs, scientists, players-tennis, film stars can uproot themselves in search of
lower taxes.
Antitrust laws
 These are intended to prevent inappropriately large concentration of economic power such
as monopolies
 Governments are becoming more active in enforcing ant-trust laws e.g. US, European
Union, Singapore, China, etc.
 They call for open markets
 The law is not violated by market dominance only by misuse of that dominance to damage
competitors or consumers
 There has been a proposal for global anti-trust laws
 But is often difficult for international businesses to comply with a variety of anti-trust laws
worldwide, e.g., Microsoft
 1990- the US and other states brought anti-trust action against Microsoft
 The European Union brought several actions against Microsoft resulting in a time of £2.5
billion.
 2008 there were rumors that China was examining the monopoly position of Microsoft
 This is an example of how one company can get bogged down with anti-trust laws in
multiple jurisdictions
 There is a need therefore for worldwide cooperation in antitrust enforcement
 The differing interest may be a barrier to reaching an antitrust cooperation
Tariffs, quotas, and other trade obstacles
 Every country has laws on tariffs and quotas
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 They are also legal forces
 Tariffs keep certain goods out of a country
 Quotas limit the number of amount of imports
 There are other forms of protection or obstacles to trade.
 Some are in health and packing requirements
 Others deal with languages such as the mandatory use of French on labels and in
advertising, manuals, warranties, etc.
Torts
 These are injuries inflicted on other people either intentionally or negligence
 Torts results in an award of every large sum of money
 Other countries have tort laws that restrict the amount of money that can be obtained in tort
actions
Product liability
 It’s one area of tort
 Product liability laws hold a company and its offices liable and possibly subjected to fines
or imprisonment when its product causes death, injury, or damage
 As companies buy or bind plants in foreign counties they are affected by liability and
insurance problems e.g., USA
 Manufacturers of products are held to a standard strict liability which holds the
manufacturer liable to damages caused by their product without the need to prove
 Areas like the European union use development risks defenses which allow the
manufacturer to defend himself.
 They are permitted also to cap damages
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 In the USA product liability cases are heard by juries who alongside paying damaged ask
for punitive damages, which are used to teach the defendant a lesson
 It’s important for foreign investors to research the type of laws in the country they want to
invest in and find out if there are product liability insurances to avoid court cases.
 The multimillion-dollar punitive damages awarded by the US has caused foreign firms to
keep their products out of America e.g., medicine
 In the USA drug company knows that if a person uses a drug and subsequently gets ill,
there is a chance that liability on the manufacturer will be given to pay damage
 Japanese law on production liability required that the planity prone design or
manufacturing negligence which is difficult due to high tech devices
 They require documents relevant to their case
Other laws (Miscellaneous)
1. Individuals working abroad must be alert to avoid falling a victim to local laws and policies,
army or government officials
a. e.g., 2 Australians executed in Malaysia for possessing 15gms of hard drugs
b. British subject serving a life sentence in Libya for giving information to a foreign
company (Revlon).
c. Muslim countries- enforce sanction acquiring importing or drinking alcohol and
wearing revealing clothes
d. Japan without alien registration cards can be arrested. It happened to many who
was taking out cabbage.
e. In Thailand – arrest on damaging coins that bear pictures of a royal prince- stopping
coin with your foot- arrested
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f. Singapore- littering, splitting- serious offenses- you are canned
g. Unmarried couples- if they stay overnight in one room in China -10 days jail.
2. Foreign corrupt practices act
 It’s a law against making payments to foreign governments offices for special treatments
 Bribery is considered bad business and unnecessary
 Having an international reputation for transparency and being perceived as the above board
is important for global companies
 There is a need for company values that support integrity because integrity is better for
business than corruption activities.
 Transparency international which publishes countries bribe payers index helps countries to
fight corruption
3. Accounting laws
 Investors’ confidence is important because on financial reporting of country
 Many countries have addressed issues of corporate government and finance practices by
establishing auditor independence and attorney conduct/ act
 This act affects operations of public companies in various dimensions including financial
disclosure, investors/officers’ responsibilities, and auditor independence
 It bars companies outside auditors for consultations
 Most accounting practices follow the generally accepted accounting principles
Topic 5
4. International socio-cultural Environment (forces)
 Knowing your customer is just and important anywhere in the world as it is at home
whatever you are aiming at selling
118
 Each culture has its logic and within that logic are real sensible reasons for the way
foreigners do things
 If the business person can figure out the basic patterns of the culture, he or she will be more
effective interacting with foreign clients and colleagues
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CULTURE AND INTERNATIONAL BUSINESS
What is culture?
It’s the total of the belief roles techniques institutions and artifacts that characterize a human
population
It consists of the individual world views, social roles, and interpersonal dynamics
characterizing a group of people in a particular time/ place
Anthropologists agree that: i.
Culture is learned not innate
ii.
Various aspects of culture are interrelated
iii.
Culture defines boundaries of different groups
iv.
Culture is shared
Many societies consider their culture superior (ethnic centricity) and their attempt to
introduce their culture may be met with resistance
How do international business people learn to live with other cultures? By
i.
Realizing that there are virtues different from their own
ii.
Learn to characteristics of these cultures to understand them
Culture affects all business functions, which includes marketing Human resources, production, and
finance
In marketing, the wide variation in attitude and values required firms to use different
marketing mixes in different markets
Procter Gamble –Camey
E.g., an advertisement showing a Japanese woman bathing when her husband walks in and
she starts telling him of the new beauty soap.
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The man stocking her shoulder hints that what she saying is not what is in his mind.
This advertisement was well received in Europe but failed in Japan
This shows a lack of knowledge of business culture
After two years- the Proctor &Gamble was on its feet again on the soap, they send people
to research on Japanese dishwashing habits found they use more detergents than was needed
This meant consumers needed more powerful soap, which they created in their laboratory
The market message was “a little bit of Joy cleans better yet is easier on hands”. This
message hit home
Many rushed to buy the detergent
Their cylinders of a job took little space in retailer shops even in stores and delivery trucks,
unlike Japanese soap
Proctor and Gamble designed a T.V commercial showing a famous comedian dropped in
a home, makes unannounced c a camera crew to test the detergent on dirty dishes in the home.
The camera focused on a patch of oil in a pan full of water.
After a drop of joy, the oil patch vanished
70% of the uses started using it after the advert
It's important that each element of marketing be considered for their cultural relevance
E.g., studies show that background music in ads that is not consistent with the rest of the
add e.g., traditional Chinese music in an ad for modern shampoo products featuring blond models
will increase recall of the ad but will probably produce a negative response
A global firm can have problems when its management makes culturally insensitive
decisions
Resource
121
2.
Human management
National culture is a key determinant for the evaluation of managers e.g., Britain and
American Manager companies
People were promoted because of the school they had attended and their family background
NOT from their accomplishments
This is the case in France and India, Elite Bishop Cotton Boys’ School
3.
Production and finance
Personnel problems can result from differences in attitude towards Authority
In Latin, America managers are regarded as patrons, authoritarian figures responsible for
their welfare.
If an American manager is transferred to Latin America, he must become authoritarian to
avoid being seen as weak and incompetent
Issue of a pen- Americans instituted a more democratic decision-making style
Workers were to give their view
They started the resigning –asked why- they said the new person didn’t know what to do
for asking advice
Production managers have found that attitudes towards change can seriously influence the
acceptance of new production methods.
Treasurers/ financiers also realize the strength of social-cultural forces when armed with
excellent balance sheets
On approach banks they find banks attach more importance to who they are than the
strength of their companies.
Socio-cultural components
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Business people need to understand there are cultural differences which they must look
The more you know about a person’s culture the better the predictions of that person
behavior
Cultural component includes
Aesthetic – which is a cultural sense of heavy and good taste.
It’s expressed in art, drama, music, and fork love and dances.
In art, the interest in business is the formal aspect of art color and firm because of the symbolic
meaning they convey
Colors mean different things in different cultures
a.
E.g., black morning- the US –MEXICO
b.
Black and white far east
c.
Purple- Brazil
d.
Green –Common color in the Muslim world- likely to produce success (profitous) any
package in green –looked favorably
Marketers have to be careful to check whether colors have any special meaning before
using them for products, packaging, or advertisements
Symbols need to be checked i.e., good luck in the US –bad lack in Singapore, Ghana,
Kenya, Japan 4—unlucky
Avoid using a Nation’s flag or anything connected with religion. Nike the athletic
shoemaker recalled 38,000 pairs- carrying the word Airwing written in flaming letters because to
Muslims it resembles the word Allah in Arabic
Recently protests in Europe followed the publication in Denmark of cartoons showing
Mohammed wearing a turban shaped like a bomb
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Form –building –old building
Body and beauty
Padaung tribe female necks are elongated with coils of brass rings
Definitions of ideal weight are up for grabs
Rich countries –wealthy are there while poorer countries the poor are there
Japan star athletes are obese Nigeria brides enter fattening rooms to bulk up
Japan criminals were tattooed by the government as a way of identifying them
Music/folklore
Music commercials are generally popular worldwide but tastes vary and the marketer must
know what kind of music each market prefers to consider the target group
Folklore can disclose much about a society way of life
In areas where nationalistic feelings are strong local firms have been able to compete
successfully with foreign affiliates by making use of indigenous folk love in the form of slogans
and proverbs
Attitude and beliefs
Time /or punctuality is important in some cultures than others. E.g Americans believe if
they have to wait for someone after the appointed hour then the person is not giving importance to
the meeting
For others, it’s the opposite like Latin, America, Asia, and the middle east are said to have
no concept of time
The issue of time people should not change their lifetime habit for a stranger
It is important for business people to understand and adapt to local conditions to avoid
disappointments
124
Spain/ Mexico- siesta—is important to them
American directness and drive are interpreted by many foreigners as rude.
Americans want to get to the point in a discussion and this irritates others
Courtesies are important in business negotiations
West emphasizes deadlines and speed.
The far east countries e.g. Japan don’t respond to negotiation immediately but wait to
internalize the talks then respond later
Japanese- tractors –lowering the price
Attitudes towards achievements and work
Germans put leisure first and work second
In America its work first then leisure
To Germans promise of over, time may fail to keep workers on the job
In developing nations people attitude is to work hard to get money to buy what others have
(demonstration effect)
Their attitude to work changes because they now want what only money can buy
Attitude towards is also associated with the prestige of certain kinds of employment
The difference between blue and white-collar jobs is great.
Religion
Religion is responsible for many of the activities and beliefs affecting human behaviors
Knowledge of the basic ideas of some of the more popular religions will contribute to a
better attitude vary so greatly from one country to another
Work ethics
Westerners/ European see work as a moral virtue and don’t favor idleness
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This stems from protestant work ethnic which has it that its ones duty to glorify God by
Hard work and practice of things
Confucian work ethics –has also that drive towards hard work as protestants
Religions have a pervasive influence on business
Religions holidays and rituals can affect employees performance and work schedule
When members of different religions work together there may be strife within the
workforce
Managers must respect the religious beliefs of others and adopt business practices that
respect other cultures.
Material culture
It refers to all human-made objects and is concerned with how people make things
(technology) and who makes what and why (economic)
Technology
The technology of a society is the mix of usable knowledge that society applies and directs
towards the attainment of cultural and economic objectives. It is important in improving the living
standards of people. It is a vital factor in competitive strategies in multi-national firms. Technology
superiority is the goal of most companies. It is important for international companies because
1.
It enables firms to be competitive or attain leadership in the world market. e.g. Samsung
–Korea firm used to make unappealing items. Its skill in the design of sleek products have made it
a leader in cell phone and tops the global market for color T.V.
2.
It can give firm confidence to enter the foreign market
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3.
It can enable the firm to obtain better than a usual condition for a foreign market investment
because the host country wants technology which the firm has.
4.
It can be sold or used in a company's product
5.
It can enable a company with only a minority equity position to control the joint venture
6.
It can change the international division of labor i.e. new technology reduces the direct labor
content of their products
Technological cultural aspects are important to international managers because new production
methods and new products require that people change their beliefs and ways of living. For a firm
to institute change it has to change people’s attitudes first to accept the change. Appropriate
technology should be used that fits the society using it. The information technology industry is
changing at a pace that is alarming to business executives. Businesses can mine data from the
internet to enrich their firms. The Internet has enabled firms to enter the global market
4.
LANGUAGE
Spoken language is a key to culture and without it people find themselves locked out of culture's
perimeter. The languages and attitudes of people develop naturally as they grow. Language
demarcates culture i.e distinguishes one culture from another. When many languages exist in a
country usually one language serves as the principal vehicle for communication across cultures –
Lingua franca—link language.
Former colonial countries speak the languages of their former masters. This may be effective than
native tongue for reaching the mass market or for day-to-day communication between managers
and workers. Foreign workers may not be able to communicate in countries they are employed and
this has forced managers to put those speaking the same language in the same department. It is
important to teach managers the language of their workers
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English is the link language because it’s the only spread language. People from different countries
use English for transactions.
Although more business people speak English once they buy they do their businesses in their
language. Sellers who speak local languages have a competitive edge (German---Spanish and
suitcase)
Foreigners expect to establish relationships first and the casual exploratory conversation that
follows proceeds the business.
TRANSLATIONS
The smallest market requires technical manuals catalogs and good advertising ideas. Organizations
should look for an expert to do translations because they need those sales aids. Words from the
same language frequently vary in meaning from one country to another or from one region to
another. Incorrect translation of a single word can ruin the market.
Ensure you have two people translating the same labels then compare. Translating technical words
is not easy since some do not exist in some languages.
Unless translators have special knowledge of the industry they will go to the dictionary for literal
translation that makes no sense. The French government has been discouraging the English
language in France. This is a losing battle because the internet is in English. Japanese products use
English. (Japan has in its Menu announcing Sandwiches and miss gorilla(mixed grill)
NO UNPLEASANTNESS
Also in languages responses differ. The Japanese have no NO word and don’t say anything in
disagreement They only nod and one would think they have accepted all you are saying when it
all means “I hear you”.
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Brazilian will say “somewhat difficult” thus discouraging managers of the other side and will
explain the difficulty for you to understand (they don’t want to give the bad news).
HUMOUR
It means different to different people.
UNSPOKEN LANGUAGE
Nonverbal communication can often tell businesspeople something that spoken language does not.
The different customs may cause misinterpretation of communications. Gestures are common but
vary from region to region.
CLOSED DOORS
Germans -----open doors means disorderly
Americans it means ready to receive others
OFFICE SIZE
To Americans large office means executive
To Arabs –the president's office is in a crowded place
In Japan, the lower floor is reserved for management
Therefore to be safe never gauge people's importance by the size and location of their offices.
Conversational distances are important. In the middle east distance is small, in Asia, the distance
is large, in the West it is average.
The distance varies by gender and familiarity of parties involved. There's an intimate distance for
embracing and whispering.
LANGUAGE OF GIVING
Gift exchange is an important aspect of the very business person life. Entertainment outside office
hours and the exchange of gifts is part of the process of getting better acquaintances.
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The language of giving varies across cultures. Gifts have a different meaning –
Red flower—strong feelings
Cutlery---friendship cutter
Common gifts are chocolate, red roses, scotch whisky, books, etc
Some gifts are given to induce officials for the favor. This is called a bribe.
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