CHAPTER 1: BAFIN
INTRODUCTION TO INTERNATIONAL BUSINESS
International Business
- All commercial transactions between two or more
countries.
- Involve modes of business that differ from those
at the domestic level.
- Foreign conditions diversity company’s external
environment.
International Business Defined
- All commercial transactions between parties in
two or more countries.
- Private firms are profit-oriented.
- Government organizations may or may not be
profit-oriented.
The international business environment is more complex
and diverse than the domestic business environment.
International Business consists of transactions that are
devised and carried out across national borders to satisfy
the objectives of:
- INDIVIDUALS
- COMPANIES
- ORGANIZATIONS
NATURE
- Accurate information and timely
- The size of the international business
- Market segmentation
- International markets have more potential than
domestic markets.
SCOPE
- International Marketing
- International Finance and Investments
- Foreign Exchange
- Global HR
FEATURES
- Large scale operations
- Integration of economies
- Dominated by developed countries and MNCs.
- Benefits to participating countries
- Keen competition
- Special role of science and technology
- International restrictions
IMPORTANCE
1. Earn foreign exchange.
2. Optimum utilization of resources
3. Achieve its objections.
4. To spread business risks
5. Improve organization’s efficiency.
6. Get benefits from Government.
7. Expand and diversity
8. Increase competitive capacity
THE NEED FOR INTERNATIONAL BUSINESS
 Causes the flow of ideas, services, and capital
across the world.
 Offers consumers new choices.
 Permits the acquisition of a wider variety of
products.
 Facilitates the mobility of labor, capital, and
technology.
 Provides challenging employment opportunities.
 Re-allocates resources, makes preferential choices,
and shifts activities to a global level.
INTERNATIONAL BUSINESS QUESTIONS AND CHALLENGES
 Will an idea, good, or service fit into the
international market?
 Should trade or investment be used to enter a
foreign market?
 Should supplies be obtained domestically or
abroad?
 What product adjustments are necessary to be
responsive to local conditions?
 What are the threats from global competitors?
THE FOUR RISKS OF INTERNATIONAL BUSINESS
THE FOUR TYPES OF RISKS IN IB
 Cross-cultural risk: a situation or event where a
cultural miscommunication puts some human
value at stake.
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Country risk: potentially adverse effects on
company operations and profitability holes by
developments in the political, legal, and economic
environment in a foreign country
Currency risk: risk of adverse unexpected
fluctuations in exchange rates
Commercial risk: firm's potential loss or failure
from poorly developed or executed business
strategies, tactics, or procedures.
RISKS: ALWAYS PRESENT BUT MANAGEABLE
 Managers need to understand their implications,
anticipate them, and take proactive action to
reduce adverse effects.
 Some risks are extremely challenging, e.g., the
East Asian economic crisis of 1998 generated
substantial commercial, currency, and country
risks. Political and social unrest surged to
Indonesia, Malaysia, South Korea, Thailand, and
the Philippines.
4. Minimize competitive risk to prevent competitor
from gaining advantages.
 to minimize
o take advantage of business cycle
differences among countries.
o Diversify suppliers across
countries.
o Counter competitors' advantages.
MODES OF INTERNATIONAL BUSINESS
 MERCHANDISE EXPORTS AND IMPORTS
Are the most common international economic
transactions, especially for smaller companies. And ...
A major source of international revenue and expenditures
for most companies
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SERVICE EXPORTS AND IMPORTS NONPRODUCT
INTERNATIONAL EARNINGS
o Tourism and transportation
o Performance of services for a fee
o Use of assets by others - Licensing Agreements
WHY COMPANIES ENGAGE IN INTERNATIONAL
BUSINESS?
1. Expand sales and greater purchasing power in the
world as a whole.
 to expand sales
o Volkswagen [Germany]
o Ericsson [Sweden]
o Michelin [France]
o Nestlé [Switzerland]
o IBM [USA]
o Seagram [Canada]
o Sony [Japan]
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INVESTMENTS - ownership of foreign property in
exchange for financial return.
o Foreign direct investment
o Investor gains a controlling interest in foreign
companies by joint venture or mixed venture
another option is a Portfolio investment
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International Companies the terminology
o Strategic alliance collaborative arrangement of
critical importance to the competitive viability
of one or more partners
o Multinational enterprise (MNE)
2. Acquire resources of products, services,
components also, foreign capital, technologies,
and information.
 To acquire resources
o Products, components, services
o Foreign capital
o Technologies
o Information
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LICENSING - official or legal permission to carry on
an activity
o A permit from an authority to own or use
something, do a particular thing or carry on a
trade through agreement between licensed
entity (Licensee) and granting authority.
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FRANCHISING - A marketing system revolving
around a two-party agreement, whereby the
franchisee conducts business according to the
terms specified by the franchisor.
o Single franchise owner
o Master franchisee
3. Diversify sources of sales and supplies, takes
advantage of business cycle differences among
countries.
INTERNATIONAL BUSINESS: OPERATIONS AND
INFLUENCES
INTERNATIONAL BUSINESS:
OPERATIONS AND INFLUENCES
The External Influences
Physical And Societal Factors
POLITICAL
- that affect whether and how International
Business occurs.
DOMESTIC AND INTERNATIONAL LAW
- determines what managers can do in International
Business.
ECONOMICS
- determines the types of investment.
GEOGRAPHY
- determines location and availability of world’s
resources.
To operate within a company’s external environment, its
managers must have:
 Knowledge of business operations
 A working knowledge of social sciences…
 And how they affect all functional business fields.
INTERNATIONAL BUSINESS: MEASURING GLOBALIZATION
Political Engagement
 Foreign Aid
 Treaties
 Organizations
 Peacekeeping
Economic Integration
 International Trade
 Foreign Direct Investment
Personal Contact
 Travel and Tourism
 Telephone
 Transfer Payment
Technological Connectivity
 Internet Users
 Hosts
 Secure Servers
INTERNATIONAL BUSINESS:
GLOBALIZATION GOOD OR BAD?
Threats to national sovereignty
Economic growth and environmental stress
Growing income inequality and personal stress
Offshoring – transferring of production abroad
Is controversial in terms of who benefits when
costs are reduced and whether the process
exchanges good jobs for bad ones.
INTERNATIONAL BUSINESS:
OPERATIONS AND INFLUENCES
The External Influences
Competitive Environment
Varies by industry, company, and country.
 Strategies differ across companies.
o e.g., importance of controlling labor cost.
o e.g., influence of local and international
competitors
 Size of market differs across countries.
INTERNATIONAL BUSINESS: EVOLUTION OF STRATEGY IN
INTERNATIONAL PROCESS
Risk Minimization – foreign operations viewed as risky
international commitments evolve gradually.
PATTERNS OF EXPANSION
 Passive to active pursuit of International Business
opportunities – initially wait for foreign
opportunities.
 Limited to extensive modes of operations – begin
with importing or exporting operation.
 External to internal handling of International
Business – rely on intermediaries at first.
 Few to many foreign locations.
 Similar to dissimilar business environments.
WHY STUDY INTERNATIONAL BUSINESS?
A facilitator of the global economy and
interconnectedness.
A contributor to national economic well-being
A competitive advantage for the firm
An activity with societal implications
A source of competitive advantage for you
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CONTRIBUTOR TO NATIONAL ECONOMIC WELL-BEING
 International trade is a critical engine for job
creation. It is estimated that every $1 billion increase
in exports creates more than 20,000 new jobs.
 One of every seven dollars of U.S. sales is made
abroad.
 International business is both a cause and a result of
increasing national prosperity.
 Prosperity is accompanied by literacy rate gains,
nutrition, and health care improvements, with some
tendencies towards freedom and democracy.
A COMPETITIVE ADVANTAGE FOR THE FIRM
Increase sales:
Maximize returns: Foreign markets often generate
returns far superior to those in domestic markets.
Global scale economies: International players can
maximize their efficiencies by securing cost-effective
factor inputs from around the world.
Resource acquisition : Access to otherwise
unavailable critical resources
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AN ACTIVITY WITH SOCIETAL IMPLICATIONS
As firms increase their international activities, so
does responsibility to society to be a good
corporate citizen.
Large corporations like Wal-Mart, Unilever, and
Sony have annual revenues larger than the GDPs
of many of the nations they operate.
The internationalization of thousands of firms
negatively impacts the natural environment, e.g.
pollution (Royal Dutch Shell's refining operations
in Nigeria).
Large banks and international investment brokers
have disrupted the economies of nations with
aggressive currency trading or by manipulating
stock markets.
Some MNEs ignore human rights and basic labor
standards by establishing factories in countries
that pay low wages with substandard working
conditions, e.g. Nike in Asia.
Building factories abroad often leads to job losses
at home.
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A COMPETITIVE ADVANTAGE FOR YOU
Julie, the student in the opening vignette is
touched every day by a variety of global business
transactions.
She is considering a career in international
business because she is grasping its importance
and growing role in the world.
Working across national cultures exposes
managers to a diversity of experiences, new
knowledge, novel ways of seeing the world, and
unusual challenges.
Internationally experienced managers are typically
more self-confident, and cosmopolitan, and have
positioned themselves for unique professional
opportunities.
TOP 10 PHILIPPINE EXPORTS FOR SMALL TO MEDIUMSCALE BUSINESSES
1. Woodcraft Furniture
2. Agri-Food Products
3. Marine-Food Products
4. Coconut Water and By-Products
5. Fish and Shellfish Products
6. Household Items
7. Clothing Apparel (Clothing and Fashion
Accessories)
8. Natural Health Products
9. Processed Food & Drinks
10. Electronic Gadgets
The Philippine’s woodcraft and furniture products are
probably the most unique exports we have. Because of
the formal and informal training of our furniture workers,
we have different styles and designs coming from all
corners of the country. This industry has shown a steady
growth of 11% per year for the past decade making it a
truly surging export of the Philippines. (Examples are
woodcarvings, rattan, and bamboo furniture.
Note: other top exports of the Philippines consist of Gold,
Petroleum, Automotive parts and accessories,
Semiconductors (large-scale business)
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IMPLICATIONS/CONCLUSIONS
Managing an international business differs from
managing a domestic business because:
o Countries and cultures are different.
o International business operations are more
complex than domestic operations.
A company’s own competitive strategy influences
how and where it can best operate.
From one country to another, a company’s relative
competitiveness will vary because of the
differences in the local and foreign competitors
that are present.