International
Business
Environments & Operations
Chapter 1
Globalization and
International Business
Daniels ● Radebaugh ● Sullivan
1-1
Globalization

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Human contacts expanded variety of resources,
products, services, and markets
We have altered the way we want and expect to live
We buy products from all over the world
Globalization:



Enables variety, better quality, and lower prices
Enables products availability all round the year (even
out of seasons)
Due to consumer demands, many countries have
removed restrictions on international movement
of goods and services
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Defining Globalization

Globalization is the broad set of interdependent
relationships among people from different parts of
a world divided into nations


Restrictions on imports has decreased
Foreign ownership of assets as a percentage of world
production has increased


25% of world production is sold outside its country of origin
The term refers to the elimination of barriers to
international movement of goods, services,
capital, technology, and people that influence the
integration of world economies

That is, integration of world economies
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Measuring Globalization

Two problems in measuring globalization:

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
Degree of two countries’ interdependence must be
measured indirectly
When national boundaries shift, domestic business
transaction can become international or vice versa
Some countries are more globalized than others.
Some are globalized on one dimension more than
on other dimensions

Dimensions

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Economic: International trade and investment
Technological: Internet connectivity
Personal contact: Intl travel and tourism, telephone traffic,
personal transfers of funds
Political: Participation in intl organizations and governement
monetary funds
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What is International Business?

International business consists of all
commercial transactions—including sales,
investments, and transportation—that
take place between two or more countries

increasingly foreign countries are a source of
both production and sales for domestic
companies



The ‘Made in’ label is no more correct
The private businesses seek profit
The governments seek profit and/or politics
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Why Study Intl Business?

It is important to study international business
because IB is now a large proportion of world’s
total business
 Most companies are either international or compete with
international companies (secure supplies, sell output, compete)
 Global events and competition affect almost all companies,
regardless of industry (need to approach operating strategies
from international standpoint)



International companies have more complex environments
than domestic firms.
An understanding of IB helps you make better and
informed career decisions
An understanding helps you decide what government
1-6
policies to support
IB: Complex set of relationships among
conditions and operations
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International Business
Doing business at home may not be the
same as doing it in another country
 Differences:

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
Modes of business
Physical, social, competitive conditions
Diverse and complex operating environments
Effects

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Profits
Employment security and wages
Consumer prices
National security
1-8
Forces Driving Globalization
1.
Increase in and application of technology
Developing and not just producing; innovations
Improving pace of production and transport of perishable goods
2.
Liberalization of cross-border trade and resource movements
Reasons: reduce uncertainty, more variety at lower prices, competition
increases efficiency, other countries remove barriers in return
3.
Development of services that support international business
Bank credits, currency exchanges, insurances; Universal Postal Union
4.
Growth of consumer pressures
Demand more, newer, better, differentiated products and services
1-9
Forces Driving Globalization
5
Increased global competition
Some businesses are ‘Born Global’
6
Changing political situations and government policies
Transformation of policies, bridging countries (communists and noncommunists), open seaports and airports and other transport channels
7
Expanded cross-national cooperation
Treaties, agreements, and consultations
To gain reciprocal advantage, seek joint problem solving,
deal with concerns that are outside country boundaries (e.g.,
diseases and natural disasters)
1-10
Globalization vs Anti-globalization

Most of the world’s goods and services are
still sold in the countries where they are
produced

Principal source of capital in most
countries is domestic and not international
1-11
Costs of Globalization

Threats to national sovereignty
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Economic growth and environmental
stress

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lose freedom to “act locally”
Threat to national interests, objectives, and policies
Cultural homogeneity (customs, traditions, values,
language)
growth consumes nonrenewable natural resources
and increases environmental damage
Growing income inequality and personal
stress

promotes global superstars at the expense of
others
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Costs of Globalization

Offshoring, a type of outsourcing,
involves the transferring of production
abroad



it can be beneficial because it reduces costs
but, it also means that jobs move abroad
Yet, offshoring may also create new,
better jobs at home
1-13
Why Companies Engage in IB

To expand sales

To acquire resources
and willingness)
 pursuing international sales increases the potential
market and potential profits


(depends on consumer interests
may give companies lower costs, new and better
products, and additional operating knowledge
(services, resources, and components)
To diversify or reduce risks

international operations may reduce operating risk
by smoothing sales and profits, preventing
competitors from gaining advantage

Different business cycles; price swings and
shortages from place to place
1-14
Why Companies Engage in IB

Advanced communication systems have
enabled better control and supervision of
global operations

Three reasons (sales expansion, resource
acquisition, risk minimization)
Guide all decisions about whether, where,
and how to engage in international
business
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Modes of Operations in IB

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Merchandise exports
 Tangible goods that are sent out of a country
Merchandise imports
 Tangible goods that are brought into a country
Sometimes referred to as visible exports and
imports

Flag of convenience: The registration of a ship by
shipping company that charges low taxes

When national borders shift (countries’ merge or
separate), physical barriers to exporting and
importing are created
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Modes of Operations in IB
Non-product international earnings
 Service exports
 provider of services and receiver of payment
 Service imports
 recipient of services and payer of payment
 Examples/ Forms of services
 Tourism and transportation
 Service performance
 turnkey operations (construction projects
performed under contract) and management
contracts (personnel offered)
 Asset use
 licensing (use patents, copyrights, and
expertise for royalty) and franchising
1-17
Modes of Operations in IB


Dividends and interests paid on foreign
investments are also service exports and imports
Investments
 Foreign Direct Investment (FDI)
 investor takes a controlling interest in a
foreign company
 joint venture
 Portfolio Investment
 a non-controlling financial interest in
another entity (e.g., stocks in a company or loans
in the form of bonds, bills, or notes)
 Mutual funds often include international
companies
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Modes of Operation in IB

International companies operate internationally
Variety of Terms but together they can be called as collaborative
arrangements


Collaborative arrangements
 Joint ventures
 Licensing arrangements
 Management contracts
 Minority ownership
 Long-term contractual arrangements
Strategic alliance
 companies that work together, but the
agreement is critical to at least one partner
 an agreement that does not involve joint
ownership
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Types of International
Organizations

Multinational enterprises (MNEs)


take a global approach to markets and
production or have operations in more than
one country

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Usually BIG size
Typically uses most of the modes of intl business
Sometimes they are referred to as



multinational corporations (MNCs)
multinational companies (MNCs)
transnational companies (TNCs)
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Types of International
Organizations

In foreign markets, companies often have
to adapt their typical methods of doing
business


foreign conditions may dictate a particular
method
operating modes may be different from those
used domestically
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Why IB is Different
The external environment affects a
company’s international operations
 Managers must understand social science
disciplines and how they affect functional
business fields
 Consider




physical factors (geography)
social factors (politics, law, culture, economics)
competitive factors (number and strength of
suppliers, customers, and competitors
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Physical and Social Factors

Geographic influences


Political policies


influence how a company operates
Behavioral factors



countries determine where and how business occurs
within their borders
Legal policies


natural conditions influence business locations
may require adaptation in to local conditions
High individualist are competitive and high masculine
people ‘live to work’
Economic forces

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explain differences in costs, currency values, market size
The Competitive Environment

Competitive strategy for products

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Company resources and experience

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Cost strategy
Differentiation strategy
Focus strategy
market leaders have more resources for
international operations
Competitors faced in each market

local or international
1-24
The Competitive Environment
So, a company’s competitive strategy
influences how and where it can best
operate
 Its competitive situation may differ from
country to country in terms of its relative
strength and which competitors it faces

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Looking to the Future

Three major perspectives on the future of
international business and globalization



Further globalization is inevitable
International business will grow primarily along
regional rather than global lines
Forces working against further globalization
and international business will slow down both
trends
1-26
Summary
Globalization is the widening set of
interdependent relationships among
people from different parts of a world
divided into nations
 International business consists of all
commercial transactions—including sales,
investments, and transportation—that
take place between two or more countries

1-27
Summary

It is important to study international
business because





Most companies are either international or
compete with international companies
Global events and competition affect almost all
companies, regardless of industry
International companies have more complex
environments than domestic firms.
An understanding helps you make better
career decisions
An understanding helps you decide what
government policies to support
1-28
Summary


The factors of International Business include:
Geographic influences


Political policies


influence how a company operates
Behavioral factors


Countries determine where and how business occurs
within their borders
Legal policies


natural conditions influence business locations
may require adaptation in to local conditions
Economic forces

explain differences in costs, currency values, market size
1-29